The Federal Reserve has aggressively raised interest rates in hopes of cooling the economy and curbing inflation, which remained at 8.3% in August around a 40-year high.
Their aim is to reduce demand and slow rising wages so that high consumer prices do not become ‘anchored’. But top officials noted this week that this won’t be a “painless” process for Americans.
And now some of Wall Street’s most famous minds are arguing that the Fed doesn’t have the tools it needs to really tame inflation.
While central banks can act to slow down the demand side of the economy, their policies do not have much effect on the supply of goods, services or workers. And many economists and top investors argue that increased domestic production of scarce goods and raw materials, coupled with a growing workforce, is an important part of the inflation puzzle.
On Thursday, Bill Ackman, the CEO of Pershing Square Capital Management, argued that immigration, not the Fed, could be the solution to inflation, taking a very different tone from his aggressive comments several months ago, in which he added. urged central bank officials to raise interest rates. .
“Inflation can be limited by reducing demand and/or increasing supply. The Federal Reserve can only reduce demand by raising interest rates, a very blunt instrument,” Ackman wrote in a statement tweet. “Isn’t it more logical to moderate wage inflation with more immigration than by raising rates, destroying demand, putting people out of work and driving a recession?”
Known for heated debates with fellow Wall Street titan Carl Icahn, the billionaire investor suggested using Russian immigrants to ease upward pressure on wages.
“If we can focus immigration policy on achieving important political goals, such as catalyzing a Russian talent to go to the US, why not do it?” He wrote.
“Let’s remove the barriers for the brightest of Russia. The most talented Russians must leave now before they become fodder in an unjust war. By doing so, our economy will be saved and Russia’s future will be destroyed,” he added in a separate post tweet.
Ackman’s comments came after Russian President Vladimir Putin ordered the mobilization of 300,000 reservists on Wednesday to fight in the Ukraine war, forcing thousands of Russians to flee the country. Russia was already dealing with a serious talent drain, with about 4 million Russians moving towards greener pastures in the first three months of 2022 alone. Ackman argues that the US should be willing to take in at least some of these disgruntled Russians in order to boost our workforce and fight inflation.
As for Ackman’s point that immigration may lower inflation, a National Bureau of Economic Research study by Harvard economist George Borjas found that rising immigration lowered the wages of competing domestic workers, which may have a cooling effect on inflation. to have.
And researchers at the Federal Reserve Bank of Kansas City explained in a May article that when immigration slows down, it can raise wages domestically and exacerbate inflation.
While it may sound counterintuitive to economists and investors to argue for more immigration to slow wage growth, they fear that a wage-price spiral — in which inflation-induced wage increases add to business costs, pushing prices even further — will eventually inflation impossible to control.
Former IMF chief economist Olivier Blanchard said last week that he believes the US is already experiencing a wage-price spiral, and warned that stopping the trend would likely require significant job losses.
A big shift
Ackman’s latest comments about the Fed fueling a recession with its rate hikes represent a seismic shift in his thinking over the past few months.
In June, the billionaire called on the Fed to become “aggressive” with a 75 basis point rate hike, arguing that the institution was losing credibility over officials’ unwillingness to fight inflation.
Ackman got his wish. The Fed raised rates by 75 basis points in June and then continued with two more 75 basis point hikes in July and September, marking the fastest pace of US monetary tightening since the 1980s.
But with the S&P 500 down more than 10% this month, and more economists claiming a recession is imminent, Ackman is warning that the Fed may be overdoing it.
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