After mischaracterizing the rise of inflation as transitory in 2021, the Federal Reserve has had its fair share of critics. Officials at the central bank were first bombarded by calls for interest rate hikes to help fight soaring consumer prices, with some economists arguing a repeat of the stagflationary 1970s was on the way. Then, after March of last year, when Chair Jerome Powell made inflation his top priority and began one of the most aggressive interest rate hiking campaigns in history, helping inflation to peak just three months later, dovish critics began to argue that he was doing too much, and would end up sparking a recession.
Perhaps the most vocal of those doves was Starwood Capital Group co-founder and CEO Barry Sternlicht. In October 2022, Sternlicht told Fortune that Powell and his merry band of lunatics were destroying the economy with their hawkish policies, arguing a recession was surely on the way and the resulting job losses could lead to social unrest. And in March of this year, the billionaire told CNBC that Powell was using lagging data to assess inflation, which was already fading, and his rate hikes amounted to using a steamroller to kill a small fly.
Now though, Sternlicht admits his forecasts might have been a bit too pessimistic.
I was a little early, he told CNBC Thursday. I didnt understand the strength of the consumer. I think people are employed and when people are employed, they spend money.
Although jobless claims have been rising in recent weeks, the unemployment rate remains near pre-pandemic lows. Sternlicht said that this is at least in part due to a backlog of 350,000 empty jobs in the hospitality sector, which struggled to find talent during the pandemic. The billionaire CEO, who owns and operates some of the worlds largest hotels through his investment firm Starwood Capital, said he still has no workers and argued there will be an additional tidal wave of new jobs created as companies like his hire to fill that gap. This should help prevent unemployment from rising too much, he saidat least for now.
A softening economy or a soft landing?
Sternlichts comments come after a number of experts have come out against Wall Streets bearish recession forecasts in recent weeks. Moodys Analytics chief economist Mark Zandi detailed five reasons why hes betting against a U.S. recession in a CNN op-ed Tuesday, including consumers healthy savings, light debt loads, and anchored inflation expectations as well as low oil prices and the strong labor market. And CitiGroup CEO Jane Fraser told members of Fortunes CEO initiative at a dinner on Wednesday that although she is seeing signs of softening in the economy, shes not stressed.
[T]he consumers entering whatever this slowdown is are in good health, she said. The corporate client is in very good health, on their balance sheets. Theres a handful of banks that were mismanaged, but largely, banks are in very strong health. So the typical amplifiers of a recession just arent in place.
After more than a year of consistent recession predictions from billionaire investors and economists, theres a growing chorus of optimists who believe the Fed will be able to secure a soft landing for the economywhere inflation fades without a sharp rise in unemployment. (This is opposed to a hard landing, which would come with a recession.) Still, despite the more positive outlook from some leading experts, and his own admissions, Sternlicht remains worried about the future of the economy and believes the Fed could still spark a recession if it keeps raising interest rates.
We see a stronger economy, but there are signs of weakness, he warned Thursday, arguing that retail sales growth is falling off a cliff. To his point, although retail sales rose 1.6% year-over-year in May, thats still a steep drop from the 6.4% year-over-year figure seen in January, Census Bureau data shows.
The billionaire also noted that consumers now hold a record $986 billion in credit card debt, according to the Federal Reserve, and argued that delinquencies are headed higher amid higher borrowing costs and inflation.
Finally, Sternlicht said he still believes that inflation is fading fast, and that year-over-year figures will drop below 3% this year, but he wonders if that will be enough for the Fed to stop its rate hikes. The central bank has a 2% inflation target.
If the Fed continues to raise rates, he argued it will hamper the Federal governments ability to boost the economy with spending as interest expenses on the $32 trillion national debt will soar. Were going to have to keep printing money to just pay the interest expense, he said. And after regional banks issues in March, headlined by the collapse of Silicon Valley Bank, Sternlicht argued that the sector is still not in good shape, pointing to their exposure to the commercial real estate sector, which, as Fortune previously reported, is experiencing serious issues due to the work-from-home trend and the soaring borrowing costs.
Things are not fine at the regional banks, he said, arguing a short hedge fund could take any one of them down at any moment because they cant sell their bonds and are losing deposits.
