Billionaire hedge fund operator Daniel Loeb usually looks at company fundamentals instead of the macroeconomic picture in plotting his strategy. But the activist investor is leery that the Federal Reserve will make a mistake and “kill the patient” by over-doing interest rate increases.
While the founder and chief executive of hedge fund Third Point believes the odds of a recession next year are low, he cautioned in a letter to investors that “the calculus is more fragile than a year ago.”
Loeb noted that, at its current pace, the Fed will push short-term rates above 3% by the end of 2019—with two more hikes expected in 2018 and perhaps three more next year. Add in the impact of unloading bonds bought during quantitative easing, and that puts the effective impact at 4%, he reasoned.
“Tightening of that magnitude has always resulted in recession,” Loeb wrote. “While we believe this well-seasoned Fed understands exactly the tightrope it is walking, the risk of destruction action is not zero.”