The US hit the $31.4 trillion debt limit set by Congress on Thursday, forcing the Treasury to take “extraordinary measures.”
Those measure will keep the US out of default until about June, but after that lawmakers must raise the debt ceiling.
Wall Street heavyweights like Jamie Dimon, Larry Summers, Ed Yardeni and Nouriel Roubini have raised alarms about the risk of default.
Elon Musk, Paul Krugman, and Jeremy Siegel are warning the Fed risks hiking rates too high and tanking the US economy. Here’s where 7 experts see danger.
Elon Musk, Paul Krugman, and Jeremy Siegel say the Fed may be going too far with its rate hikes.
Bill Gross and David Rosenberg have also warned the central bank against tanking the US economy.
Here’s what 7 experts have said about the danger of an overzealous Fed.
Elon Musk, Paul Krugman, and Jeremy Siegel have warned the Federal Reserve risks going too far in its fight against inflation, raising the prospect of a painful recession.
Bill Gross, David Rosenberg, Robert Herjavec, and Ed Yardeni have also urged the US central bank not to hike interest rates too high, given the potentially devastating impact on the economy.
Here’s a roundup of the 7 experts’ cautions to the Fed:
Elon Musk
“The Fed is raising rates more than they should,” Musk said on Tesla’s third-quarter earnings call. “But I think they’ll eventually realize that and bring it back down again.”
The Tesla CEO and Twitter owner suggested the US central bank is overly focused on lagging indicators of inflation, and not paying enough attention to what’s ahead.
“The Fed is not listening, because they’re looking at the rearview mirror instead of looking out the front windshield,” Musk said.
Paul Krugman
“I see a strong case that the Fed has already done enough,” Krugman said in a recent column. “You want to shoot ahead of a moving target, not behind it.”
The Nobel Prize-winning economist pointed to the sharp decline in trans-Pacific shipping costs, plus flagging demand for apartments, as evidence of the inflation threat waning.
He also flagged the strong dollar’s dampening effect on US exports, and higher mortgage rates squeezing consumers and making houses less affordable.
“I’d argue that these indicators tell us that the Fed has already done enough to ensure a big decline in inflation — but also, all too possibly, a recession,” Krugman said.
Jeremy Siegel
“The Fed is slamming on the brakes way too hard,” Siegel said in a recent interview.
“The pendulum has swung too far in the other direction,” the Wharton professor added, referring to US monetary policy going from too loose to overly restrictive.
“If they stay as tight as they say they will, continuing to hike rates through even the early part of next year, the risks of recession are extremely high,” Siegel said.
Bill Gross
“The US and other economies cannot stand many more rate increases,” Gross said in a recent investment outlook.
Gross argued that huge amounts of government debt, and global headwinds such as the Russia-Ukraine war, meant that if the Fed hikes rates too far, it could “slay inflation but create a global depression.”
“If Fed stops at 4.5% then mild recession,” Gross tweeted this week. “If it goes to 5% or higher then significant US and global downturn.”
David Rosenberg
“I would posit that the Fed has already done the overkill,” Rosenberg said in a recent interview.
The Rosenberg Research founder suggested Fed officials have a “once burnt, twice shy” mentality after reacting too slowly to the inflation threat, so they’re overreacting now by raising rates too aggressively.
If the Fed continues to tighten its monetary policy, it could tank house prices, spark a credit crunch in the banking sector, weaken consumer spending, and make any economic downturn last longer, Rosenberg said.
Robert Herjavec
Consumers and enterprises are still spending money, but rising interest rates will eventually stifle that demand, Herjavec said in a recent interview.
“I worry we’re going to hit a wall, and the interest rates are going to catch up to us, and the whole thing is just going to stop,” the “Shark Tank” investor and Cyderes CEO said.
Herjavec added that he’s more worried about the Fed’s “maniacal drive with interest rates” than he is about inflation.
Ed Yardeni
“I think the Fed has to be really careful here,” Yardeni said in a recent interview.
“If they keep going without pausing, it’s really going to create a real possibility of a significant recession,” he added.
The Yardeni Associates boss pointed to declining food and energy prices as evidence that inflation is on the decline. He noted the Fed’s tightening has already hammered the housing market, and fueled the stock-market’s sharp decline this year.
8/8 SLIDES
The US hit the $31.4 trillion debt limit set by Congress on Thursday, forcing the Treasury to take “extraordinary measures” to stay out of default and putting pressure on lawmakers to raise the ceiling.
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Those measures will last until early June, and Treasury Secretary Janet Yellen warned Congress that “Failure to meet the government’s obligations would cause irreparable harm to the US economy, the livelihoods of all Americans, and global financial stability.”
But while previous political standoffs over the debt limit have eventually resulted in a deal, Wall Street heavyweights have been sounding the alarm on the risk of default in a now-divided Congress with Republicans narrowly controlling the House of Representatives.
Republicans want an agreement to include spending cuts, while the Biden administration remains steadfast against putting any conditions on raising the debt ceiling.
Political dysfunction was a factor when Standard & Poor’s downgraded US debt in 2011, and the GOP’s prolonged battle to agree on a House speaker this month underscored the likely difficulty in reaching a new debt deal.
Here’s what four influential voices on markets think of yet another debt ceiling fight.
Nouriel Roubini
The “Dr. Doom” economist pointed out that in the 2011 debt ceiling showdown, the S&P 500 shed 12% from July to August amid grinding negotiations.
“It would be crazy and a total catastrophe for the US,” Roubini told Yahoo Finance. He added that “if you default on the debt, domestic and foreign investors in the private sector are not going to buy your bonds, and you’ll have a spike in interest rates.”
Jamie Dimon
JPMorgan’s CEO said the status of US credit shouldn’t even be up for debate.
“We should never question the credit worthiness of the United States government,” Dimon told CNBC. “That is sacrosanct. It should never happen.”
He added that US debt is the backbone of the world’s financial structure. “This is not something we should be playing games with at all.”
Larry Summers
The former Treasury secretary described the fight over the debt ceiling as “potential tragedy as farce.”
“It would be catastrophic and inconceivable for the United States to default. It’s not what anybody serious does,” he said in an interview with Bloomberg TV.
He remains optimistic that a deal will be reached, and said “at the end of the day, we will meet our obligations and not cause substantial disruption.”
Ed Yardeni
Wall Street has “seen this game of chicken before,” the market veteran and president of Yardeni Research told Bloomberg TV, and has always seen politicians reach a last-minute deal.
“If that doesn’t happen this time around, then at that point, I think you’ll see Wall Street rebel and cause a real downturn in the stock market and the bond market and that will get the attention of the politicians and lead to a deal. That’s probably the most likely scenario given the adamant unwillingness to negotiate from the get-go,” Yardeni said.
