The Federal Reserve has been raising interest rates aggressively in hopes of cooling the economy and taming inflation, which was near a 40-year high of 8.3% in August.
Their goal is to reduce demand and slow rising wages so that high consumer prices do not “take root”. But senior officials indicated this week that it would not be a “painless” process for Americans.
Now, some of Wall Street’s most prominent minds are arguing that the Fed lacks the tools to really tame inflation.
While central banks can act to slow 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 senior investors argue that increased domestic production of scarce goods and commodities, along with an expanding labor force, is an important piece of the inflation puzzle.
On Thursday, Pershing Square Capital Management CEO Bill Ackman said immigration, not the Fed, could be the solution to inflation, striking a very different tone from his hawkish comments a few months ago urging central bank officials to raise rates. .
“Inflation can be reduced by reducing demand and/or increasing supply. The Federal Reserve can only reduce demand by raising rates, which is a very blunt instrument,” Ackman writes. tweet. “Doesn’t it make more sense to adjust wage inflation with increased immigration than to raise rates, destroy demand, put people out of work and cause recession?”
The billionaire investor, known for his heated feud with Wall Street titan Carl Icahn, has suggested using Russian immigrants to ease rising pressure on wages.
“If we can use immigration policy to achieve important political goals, such as accelerating the flow of talent from Russia to the United States, why shouldn’t we?” he wrote.
“Let’s remove barriers for Russia’s brightest. The most talented Russians must go now before they become the fodder of an unjust war. Doing so saves our economy and destroys Russia’s future,” he added separately tweet.
Ackman’s comments prompted thousands of Russians to flee the country after Russian President Vladimir Putin ordered the mobilization of 300,000 reservists to fight in the Ukraine war on Wednesday. Russia was already experiencing a serious talent drain, with an estimated 4 million Russians leaving for greener pastures in the first three months of 2022 alone. Ackman argues that the U.S. should be willing to accept at least some of these disgruntled Russians to boost our workforce and fight inflation.
A National Bureau of Economic Research study by Harvard economist George Borjas on immigration’s potential to lower inflation suggests that increased immigration lowers the wages of competing domestic workers, which could have a chilling effect on inflation, according to Ackman.
And researchers at the Federal Reserve Bank of Kansas City explained in a May paper that when immigration slows, it could raise wages at home and boost inflation.
While it may sound counterintuitive for economists and investors to advocate for more immigration to slow wage growth, their fear is that inflation-driven wage increases help company costs, which in turn drive up prices—which will eventually drive up wages. inflation cannot be controlled.
Olivier Blanchard, the IMF’s former chief economist, warned last week that he believed the US was already experiencing a wage-price spiral, and that reversing the trend would likely require significant job losses.
A big change
Ackman’s recent comments about the Fed causing a recession with rate hikes represent a seismic shift in his thinking over the past few months.
Back in June, the billionaire called on the Fed to be “aggressive” with a 75 basis point rate hike, arguing that the institution has lost credibility because of officials’ unwillingness to fight inflation.
Ackman got his dream. The Fed raised rates by 75 basis points in June, followed by two more 75 basis point hikes 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 alone and more and more economists arguing that a recession is imminent, Ackman is warning that the Fed may be overreaching.
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