Starwood Capital’s CEO Barry Sternlicht thinks the Fed created the banking crisis by itself, and that its interest rate hikes will hurt the economy.
“Obviously he [Fed Chair Jerome Powell] didn’t need to do what he did,” he told CNBC’s Squawk Box on Thursday about the latest interest rate increase this week, the ninth since 2022.
Sternlicht, whose hedge fund manages over $100 billion, said that Powell’s argument that the economy will not slow down due to the current banking crisis was flawed.
"He [Powell] is using a steamroller to get the price of milk down two cents, to kill a small fly," Sternlicht said about Fed’s fight against inflation (the fly) while ignoring its impact on banks.
He complained about weak regulations that allowed banks to appear stronger than they were and an "irresponsible" lack of preparation for a downturn. Regulators also failed to conduct stress tests, which involve assessing whether banks have enough capital to make it through an unexpected crisis, in the event of higher interest rates.
"You do not have to see the car hit the wall to know it's going 8,000 miles an hour and it will hit the wall," Sternlicht said about the latest rate hikes and their potential to hurt banks, particularly regional banks that are already facing market turmoil.
"The economy will have a hard landing," he added, referring to the economy falling into recession due to the Fed's interest rate hikes.
In February, the inflation rate was 6% year-over-year, down from 6.4% in January and far below the four-decade peak of 9.1% last June.
“There's good inflation and bad inflation. Good inflation is wage inflation—we should be having parties,” Sternlicht said. “He [Powell] is limiting inflation to 2%...that is not what we should want.”
Turn up the critics
The billionaire investor has been vocal about wanting the Fed to stop rate increases. In October, he blamed Powell’s persistent rate hikes for threatening capitalism and potentially leading to social unrest. The following month, Sternlicht said the interest rate hikes are “self-inflicted suicide” because they shrink economic growth without directly fighting inflation, which has been on a downward trend for about eight months straight.
Sternlicht is not alone in his criticism of the Fed, though. In a tweet Wednesday, Moody’s chief economist Mark Zandi called the rate hikes “disappointing,” adding that the quarter point hike that Powell announced this week isn’t enough to “break things,” but shows how the Fed is blinded by its inflation fight. Zandi’s assessment was that the Fed kept rates “too low for too long” as the economy began to recover from the pandemic, forcing it to play catch up to the rapid price increases across the economy.
The Fed got it wrong when they kept rates too low too long coming out of the pandemic. It’s unfair to be too critical given the uncertainties created by the pandemic. And then there is the Russian invasion. But they now risk raising rates too high too fast. That will be on them.
— Mark Zandi (@Markzandi) March 22, 2023
The recent rate hike was expected. Earlier this month, Powell had indicated the possibility of rate increases for the rest of 2023. But that was before the Silicon Valley Bank’s meltdown. Earlier this month, federal regulators seized the bank, an important lender in the tech and venture capital circles. It led to “sheer panic” and the subsequent collapse of crypto-focused lender, Signature Bank.
Banks like Goldman Sachs thought the banking rout would force the Fed to halt interest rate increases briefly, but that didn’t end up happening. And now, it’s unclear whether the Fed will stop the rate hikes anytime soon.
