Citadel CEO Ken Griffin says the Fed should continue fighting inflation—but warns a severe recession could lead to a ‘belief that the American Dream is not achievable’

“We should continue on the path that we’re on to ensure that we re-anchor inflation expectations,” Griffin told CNBC at the Delivering Alpha Investor Summit.

The Fed has raised interest rates five times this year in an attempt to cool the economy and reduce consumer prices, pushing the Fed funds rate to its highest level since 2008. And officials seem intent on continuing their hawkish monetary policies as long as the labor market remains strong. 

Even with mortgage rates rising to their highest level since 2002, Atlanta Fed President Raphael Bostic said on Wednesday that he believes another 75-basis-point rate hike is needed in November, arguing that there has been a “lack of progress” on reducing inflation.

Echoing Bostic’s comments, Griffin, whose net worth exceeds $29 billion, said that if inflation isn’t dealt with soon it could become entrenched.

“There’s a psychological component to inflation. We need to make sure that our country doesn’t start to assume that we should expect 5% or 6% or 7% inflation because once you expect it broadly enough, it becomes reality,” he said.

The cost of fighting inflation

Griffin’s hawkish take comes amid growing criticism of the Fed by economists and Wall Street portfolio managers, who argue that the central bank is being overly aggressive with its rate hikes and will end up causing a recession.

“We continue to believe that the Fed is making yet another policy mistake,” Jay Hatfield, CEO of the investment firm Infrastructure Capital Management, told Coins2Day last week. “The current rapid increase in the Fed funds rate is not necessary and significantly increases the risk of recession in the U.S.”

Griffin conceded that rapidly rising interest rates may cause an economic downturn or even a severe recession, referencing the dire predictions by fellow billionaire investor Stanley Druckenmiller last week.

“I think the Fed has another challenge. Which is, if Stan Druckenmiller is right…and we go into a deep recession late next year. Then we’re going to have had millions of Americans unemployed back-to-back, twice in a three-and-change-year period,” Griffin said. “And from the perspective of our nation, the loss of human capital that that implies is devastating.”

Griffin argued that Americans may become discouraged about the state of the country if a severe recession comes so soon after the pandemic-induced job losses of 2020.

“To be unemployed twice in such a short period of time, the diminution of job skills, career experience, derailment to future aspirations, a belief that the American dream is not achievable—those cultural and tangible impacts are really devastating,” he said.

The billionaire hedge funder added that if he were a Fed official, his goal would be to reduce inflation expectations without causing a severe recession. But when asked if the Fed can actually make that happen, he admitted it’s unlikely.

“No, I think that’s the really difficult dance they’re trying to do right now,” he said, adding that he believes there will be a recession, and “it’s just a question of when and, frankly, how hard.” 

Griffin was then asked about Stanley Druckenmiller’s forecast for “something worse” than a recession hitting the global economy next year.

“I mean, it’s possible,” he said, quickly adding a caveat: “Here’s the problem with economics…there is no answer, there are just distributions. There is just what may happen.” 

The Citadel CEO went on to argue that instead of attempting to forecast when a recession hits, investors should focus on smart portfolio allocation and managing risk.

“You don’t want to own so many equities that when the inevitable recession comes you’re forced to sell at the bottom,” he said. “That’s a much more important concept for investors to understand and to focus on, rather than trying to prognosticate when the next recession is going to happen.”