Fed slashing interest rates this summer would be a mistake: David Rubenstein

David-Rubenstein

Billionaire businessman David Rubenstein has warned that it is too early for the US Federal Reserve to declare victory on inflation after 10 rate increases in the past year.

“It’s premature to have rate cuts this summer,” Rubenstein, the co-founder and co-chairman of Carlyle Group, said in a recent conversation with CNN.

The Consumer Price Index (CPI) in the US, which measures the cost of a broad swath of goods and services, has increased 0.4 percent for the month, according to a Labor Department report Wednesday.

That equates to an annual increase of 4.9 percent, slightly less than the 5 percent estimate and the lowest annual pace since April 2021. The annual rate was 5 percent in March, excluding volatile food and energy categories.

Core CPI inflation, excluding food and fuel prices, rose 0.4 percent monthly and 5.5 percent from a year ago, both in line with expectations.

“The Fed has said its target is 2 percent inflation. There’s no way in the world you get to 2 percent this summer. The Fed will look silly if it declares victory at 4 percent,” said Rubenstein.

After spiking to a four-decade high of 9.1 percent last year, inflation has cooled off considerably although it remains much higher than Federal Reserve’s goal. Still, the most recent inflation report is expected to provide some hope that the cost of living will head lower later this year.

Rubenstein, who nearly 25 years ago hired the current Federal Reserve chairman Jerome Powell to work in private equity, said it would be “somewhat inflationary” if the Fed is seen accepting inflation above its 2 percent goal.

“People will say the Fed isn’t serious about fighting inflation. Markets will assume inflation is coming back,” said Rubenstein, who recently launched a new PBS series called “Iconic America: Our symbols and stories with David Rubenstein.”

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Since March 2022, the Federal Reserve has raised rates 10 times in a row. It is the most aggressive rate hike cycle in the US in recent history that has taken the benchmark borrowing rates to their highest level in nearly 16 years.

Due to the recent banking turmoil and the collapse of Silicon Valley Bank (SVB), it had been anticipated by the markets that the Fed may be open to the possibility of a pause. But Powell pushed back against the idea that the central bank will be lowering rates anytime soon as it is still focused on bringing price stability and achieving its inflation target.

Although officials are mum, futures markets are pricing in a 28 percent chance rates are lower in July than today and a 61 percent chance in September, according to the CME Group’s FedWatch tool, given the kind of banking turmoil the US is facing currently.

Rubenstein believes that the US economy is “doing okay” despite all the pessimism on Wall Street. “This has been the most predicted recession in the history of recession predictions. People keep saying we’re having it, but it hasn’t shown up,” said Rubenstein.

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He noted that the unemployment rate has gone down since the Fed started raising interest rates in March 2022. “The slowdown is here but I don’t think it’s clear we’re going to have a recession. We might.”

On the debt ceiling issue lingering in the US Congress, Rubenstein said he expects Congress to eventually reach a resolution just in time to avoid a technical default because a protracted default has the potential of wiping out more than 8 million jobs.

“There’s an old law in Washington that says the amount of time it takes the government of the United States to solve a problem is exactly equal to the amount of time available,” Rubenstein said.