Wall Street’s most successful hedge fund just politely told Fed Chair Jay Powell to shut up

Every time Fed Chair Jay Powell opens his mouth to discuss all the progress the central bank has achieved cooling off last year’s red-hot inflation, he may actually just be making his own job harder by confusing investors with different messages.

Citadel founder Ken Griffin, the most successful hedge fund manager on Wall Street last year, urged Powell to stick to just one key talking point so as to anchor inflation expectations best and therefore minimize the collateral damage he is visiting upon the economy.

“If I could tell one thing to the chairman I would tell him to say less,” Griffin told Bloomberg on Tuesday. “The variance of the message over the last couple of weeks has been incredibly counterproductive.” 

Ever since the S&P bottomed in October at 3,583 points, the stock market has rallied more than 10% on the belief an all-powerful Fed can claim victory over inflation and pivot to an easing bias that would put a floor beneath equity valuations.

This fear that investors have got ahead of fundamentals has already prompted luminaries like JPMorgan CEO Jamie Dimon into warning gains have been premature. 

Griffin said the problem Powell faces is that interest rates are simply too blunt an instrument to surgically target bouts of inflation in parts of the U.S. economy. 

Some sectors including the real estate market—responsible for roughly a sixth of overall GDP—react with extreme sensitivity to higher borrowing costs, he explained, while others remain largely unaffected. 

Unless the Fed can get ahead of inflation expectations in a meaningful way, he fears Powell will be stuck in a damaging game of catch-up that can only end in stricter and stricter policy decisions that unfairly damage certain parts of the economy disproportionately more than others.

Griffin warns Fed cannot work magic, so its message must be consistent

For that reason, emphasis must be placed on setting a firm ceiling on expectations by making it crystal clear to all market participants that the Fed will not pivot until its goal has been accomplished.

Everything else can only muddy the waters. 

“Write a message: We’re going to put the inflation genie back in the bottle; we’re going to do what it takes to make that happen; and we’re going to raise rates consistently until we see very clear evidence that we’ve put this behind us,” he said.

“Because every time they take the foot off the brake—or the market perceives them taking the foot off the brake—and the job’s not done, they make their work even harder.”

Ever since investors heard Powell utter the magic words “goods disinflation,” it’s been off to the races again. Investors have snapped up every bankruptcy-prone meme stock and dog-themed crypto token they can get their hands on—the riskier, the better. 

By comparison, they seem to be ignoring the other half of Powell’s statements, namely that the services sector representing over half of the U.S. economy has exhibited zero signs of easing pressure on prices within their forecast horizon.

Bullish spirits have become so emboldened of late that economists like Larry Summers predict a “Wile E. Coyote moment” where market participants don’t realize the recession has already hit until it is too late.  

Investors should heed Griffin’s words of caution.

Not only did his Citadel outperform all other peers in a challenging market environment last year, it smashed records with a $16 billion annual gain that was the largest ever made by a hedge fund.

“Everyone has these very high expectations that the Fed can just work magic on inflation, and they don’t have it that easy,” he told Bloomberg. “That’s why I really believe that the consistency of messaging is so important.”