Here’s Why This Billionaire Investor Says The Fed Is On The Right Way, But A Recession Is Still Possible

Over the past few months, economists and investors have repeatedly blamed the Federal Reserve for waiting so long to try to combat high inflation. But some of the same critics are now saying that the central bank is finally on the right track.

“I think the Fed is doing all the right things right now, reflecting the fact that the Fed didn’t do all the right things earlier this year,” said Sam Zell, founder and president of Equity Group Investments, told CNBC on Thursday.

The billionaire investor said the economy is being flooded with capital inflows at a time of near-zero interest rates and low inflation, asking “how can you expect that to not generate inflation? ” Zell also scoffed at the concept of “transient inflation,” a term used by some US officials including Fed Chairman Jerome Powell earlier this year to say that inflation will be short-lived.

“The concept of transient inflation is pretty terrible,” he said. “I’ve never heard that phrase before and I’m sure they’ll never use it again.”

US inflation rose during the year to a record 9.1% year-on-year in June. Since then, it has been on a steady decline, reaching 8.2% in September.

In an effort to curb inflation, the Fed raised interest rates six times. Its most recent increase delivered on Wednesday was the fourth straight increase of 75 basis points, bringing the benchmark federal funds rate to a range of 3.75% to 4%.

However, Zell said the US could still move towards a recession.

“It is very likely that we will have an economic recession,” he said. “Honestly, that’s what happens when you’re flooded with money in the world and everything is free — you lead to excess and excess eventually leads to recession.”

Zell said the Fed must be “resilient” by continuing to raise rates.

“I think interest rates will go higher from here,” he said. “Bringing interest rates from 0 to 2 is done very little. We are now in the third and fourth positions and on our way to the encirclement where we are seeing some impact. But it’s still very early days, and I don’t think there’s any basis for being overly optimistic that this will be done very quickly or painlessly.”

But Zell also warned of another potential crisis lurking.

“If you go back to the end of World War II to this day, we’ve had a series of recessions,” says Zell. “We have never had a recession without a liquidity crunch, and if I were to guess, I would think a liquidity crunch is next on the agenda.”

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