The Federal Reserve aggressively raised interest rates in hopes of cooling the economy and bringing inflation under control, which remained near a 40-year high in August at 8.3%.
Their aim is to reduce demand and slow wage growth so that high consumer prices do not become “entrenched”. But senior officials noted this week that it 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 get inflation under control.
While central banks can act to slow the demand side of the economy, their policies don’t have much effect on the supply of goods, services, or workers. And many leading economists and investors argue that increasing domestic production of scarce goods and raw materials, coupled with an expanding labor force, 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 hawkish comments a few months ago at barely urging central bank officials to raise rates. .
“Inflation can be mitigated by reducing demand and/or increasing supply. The Federal Reserve can only reduce demand by raising rates, a very blunt tool,” Ackman wrote in a Tweeter. “Doesn’t it make more sense to moderate wage inflation with increased immigration than by raising rates, destroying demand, putting people out of work and causing a recession?”
The billionaire investor, known for his heated debates with fellow Wall Street titan Carl Icahn, has proposed using Russian immigrants to help ease upward pressure on wages.
“If we can target immigration policy to achieve important political goals like catalyzing a flight of Russian talent to the United States, why can’t we?” he wrote.
“Let’s break down the barriers for Russia’s brightest. The most talented Russians must leave now before they become fodder in an unjust war. It saves our economy and destroys the future of Russia,” he added in a separate statement. Tweeter.
Ackman’s comments came after Russian President Vladimir Putin on Wednesday ordered the mobilization of 300,000 reservists to fight in the war in Ukraine, leading thousands of Russians to flee the country. Russia had already experienced a serious talent drain, with around 4 million Russians heading for greener pastures in the first three months of 2022 alone. Ackman argues that the United States should be willing to take in at least some of these disgruntled Russians, to help bolster our workforce and fight inflation.
To answer Ackman’s argument that immigration could reduce inflation, a National Bureau of Economic Research study by Harvard economist George Borjas found that increased immigration reduced wages. competing domestic workers, which can have a chilling effect on inflation.
And researchers from the Federal Reserve Bank of Kansas City explained in a May paper that when immigration slows, it can raise wages nationwide and exacerbate inflation.
Although it may seem counterintuitive for economists and investors to argue for increased immigration to slow wage growth, they fear that a price-wage spiral – where induced wage increases by inflation contribute to business costs, which drives up prices even more – will eventually make inflation uncontrollable.
Olivier Blanchard, the IMF’s former chief economist, said last week he believed the United States was already experiencing a wage-price spiral, and he warned that halting the trend would likely require job losses. important.
A big change
Ackman’s latest comments about the Fed stoking a recession with its rate hikes represent a seismic shift in his thinking over the past few months.
Last June, the billionaire called on the Fed to get “aggressive” with a 75 basis point interest rate hike, arguing that the institution was losing credibility due to officials’ reluctance to fight inflation. .
Ackman got his wish. The Fed raised rates by 75 basis points in June, then made two more hikes of 75 basis points in July and September, marking the fastest pace of US monetary policy tightening since the 1980s.
But now, with the S&P 500 down more than 10% this month and more economists saying a recession is imminent, Ackman warns the Fed could be overdoing it.
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