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The Fed ‘overshot dramatically’ on inflation: hedge fund founder

·Senior Producer and Writer
·3-min read
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U.S. stocks continued a steep selloff on Thursday after disappointing earnings reports from Target and Walmart affirmed fears over inflation, which remains close to its highest level in 40 years.

In a recent interview with Yahoo Finance, hedge fund founder Josh Friedman acknowledged that Federal Reserve Chair Jerome Powell is currently doing a good job of trying to “wring out” this sky-high inflation.

Still, he suggested that the Fed may have stoked inflation with its response to the pandemic. That response included slashing interest rates to near-zero and injecting liquidity into the market in 2020. The Fed did not begin to raise rates again until this March, a year after inflation began to creep up.

Higher interest rates tend to tamp down inflation, and critics of the Fed argue that Powell waited too long to hike again.

“I do think they overshot dramatically," said Friedman, co-founder of Canyon Partners hedge fund, whose comments came in the latest episode of Influencers with Andy Serwer.

The political calendar might have influenced Powell's initial descriptions of inflation as merely fleeting, according to Friedman. "I think as soon as he was reappointed, [Powell] definitely stopped referring to transitory inflation at all,” Friedman says of Powell’s nomination for a second term as Fed chair.

The rhetoric changed because inflation was being recognized as more persistent than initially predicted, Friedman acknowledged. The shift also could have occurred “maybe because he was looking at a different set of variables when he was determining whether or not he'd be reappointed,” he said.

"Once you are reappointed, he has a little bit more liberty in how he acts and can be subject to more criticism and maybe be able to take it better,” said Friedman, who worked at Goldman Sachs and Drexel Burnham Lambert before founding Canyon Partners.

‘Why we took a step back from transitory’

In terms of the timeline, Friedman is broadly correct that Powell hasn’t discussed inflation as a transitory phenomenon in recent months. However, the Fed Chair first retreated from the term during a press conference on Nov. 3, 2021, about three weeks before Biden announced his re-nomination.

During that gathering he talked to reporters about “why we took a step back from transitory.”

“It means different things to different people,” Powell said at the time, adding he had always defined it to mean it would not leave behind permanent or persistently high inflation.

While the term appeared in that day’s Federal Open Markets Committee statement, it hasn’t popped up since. Powell more formally retired the term during congressional testimony on Nov. 30, eight days after President Joe Biden nominated him for another term. In March, Powell acknowledged that “hindsight says we should have moved earlier” in taking on inflation.

The Senate put a final stamp on Powell’s re-nomination last week with a bipartisan confirmation vote of 80-19.

US President Joe Biden (L) looks on after announcing Jerome Powell (R) as his nominees for Chair of the Board of Governors of the Federal Reserve Systems during an event at the White House in Washington, DC, on November 22, 2021. - US Federal Reserve Chair Jerome Powell
President Joe Biden looks on after announcing Jerome Powell as his nominee for Chair of the Board of Governors of the Federal Reserve System on November 22, 2021. (JIM WATSON/AFP via Getty Images)

‘We did the opposite’

Friedman notes that figures like former Treasury Secretary Larry Summers have also criticized the Fed for not acting sooner to tamp down inflation.

“I have been critical of the Fed for the better part of a year on its failure to recognize that inflation became, as of last spring, the most serious short-run threat facing the American economy,” Summers recently told the Harvard Gazette.

William McChesney Martin, one of Powell’s predecessors, famously described the Federal Reserve as “in the position of a chaperone who has ordered the punch bowl removed just when the party is really warming up." That is to say, the Fed should raise interest rates before the economy begins to overheat.

“We didn't do that,” Friedman says. “We did the opposite of what McChesney Martin said we should do.”

Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.

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