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““Every time they [the Fed] take the foot off the brake or the market perceives they’re taking the foot off the brake, and the job’s not done, they make their work even harder.””
The boss of the top-performing Citadel LLC hedge fund sees a U.S. recession on the horizon, and with that, has an urgent message for Federal Reserve Chairman Jerome Powell.
“If I could tell one thing to the Chairman, I would tell him to say less. I would [say] just write a message: ‘We’re going to put the inflation genie back in the bottle, we’re going to do what it takes to make that happen, and we’re going to raise rates consistency until we see very clear evidence that we put this behind us,” Ken Griffin, the founder of Citadel and one of the world’s biggest market makers, Citadel Securities, told Bloomberg in an interview on Tuesday.
Griffin said Powell’s market-rattling remarks on Tuesday had “created space” to move by 50 basis points at the March 21-22 meeting. The policy-sensitive 2-year Treasury yield
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surged above 5% for the first time in 15 years after the Fed chief raised the possibility of reaccelerating the pace of interest rate hikes to control inflation.
Need to Know: Powell’s rate view came as no surprise to this Treasury dealer. Here’s what it says is next for stocks and bonds.
But the Citadel boss also likened the Fed’s interest rate tool as a means of controlling inflation to “having surgery with a dull knife.” That’s because “you hit the housing sector, you hit the manufacturing sector, you hit parts of the economy that have a very high sensitivity to interest rates, and you tend to leave the rest of the economy untouched,” he said.
And that’s one crucial reason why Powell and Co. need to be accurate in their messaging. “Everyone has these very high expectations [that] the Fed can just work magic on inflation and they don’t’ have it that easy,” but what they say and the perception of the American public that they can get the job done is crucially important,” he said.
Griffin was looking for more breathing room for the Fed with Friday’s important February payrolls data, which he expects will show jobs growth of around 200,000 — economists are predicting gains of around 225,000 — following January’s red-hot 517,000 payrolls gain. ADP on Tuesday estimated 242,000 private-sector jobs were created in February, though the payroll processor’s estimate for January was well below official numbers.
“That will give the Fed a bit of comfort that they’re getting the job done of cooling the economy, bringing down inflation and putting that pretty evil inflation genie back in the bottle,” he said.
But what remains to be seen is the impact on the economy of the rapid rise in rates over the past year, putting the Fed in “uncharted territory,” said Griffin.
The hedge fund boss warned that he does see a “setup for recession unfolding,” as a “postpandemic orgy of spending” by consumers flush with government cash comes to an end.
“And then we will see the true strength in the economy, and that’s going to be a really interesting moment in time…We are going to hit this moment in time we’re clearly inflation is decelerating. And the Punchbowl being empty, we’re gonna see the economy start to slow as demand fades away,” he said.
The money manager, whose hedge fund raked in a record $16 billion profit after fees last year, said his expectations on where the federal-funds rate will end up aren’t far off what the markets are predicting.
He said Citadel’s views on the Fed, and inflation, are close to what markets are expecting.
But falling in line with Wall Street can make it tougher for money managers, he said.
“Now when you manage money, you make money by having a difference of opinion as compared to the broader market. And for us, the difference in opinion we had was that inflation was going to be very hot and it was and that was a source of revenues for us last year,” said Griffin.
