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Oct. 1, 2022, 9:33 a.m. EDT

‘We are in deep trouble’: Billionaire investor Druckenmiller believes Fed’s monetary tightening will push the economy into recession in 2023

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By Isabel Wang

Billionaire investor Stanley Druckenmiller sees a “hard landing” for the U.S. economy by the end of 2023 as the Federal Reserve’s aggressive monetary tightening will result in a recession. 

“I will be stunned if we don’t have a recession in ‘23. I don’t know the timing but certainly by the end of ‘23. I will not be surprised if it’s not larger than the so-called average garden variety,” Druckenmiller said at CNBC’s Delivering Alpha Investor Summit on Wednesday. “I don’t rule out something really bad.”

Druckenmiller, one of Wall Street’s most respected minds, expressed concerns on the liquidity situation in the bond market after the Fed’s quantitative easing during the coronavirus pandemic and its near-zero interest rate policy in the past decade have created an asset bubble. 

The Federal Reserve held the fed funds target rate at a range of 0% to 0.25% between 2008 and 2015, as it countered the financial crisis and its aftermath. The Fed also cut rates to near zero again in March 2020 in response to the COVID-19 pandemic. In addition a decade-long period of quantitative easing doubled the central bank’s balance sheet to nearly $9 trillion. 

See: Will October be another stock-market ‘bear killer’? Why investors need to tread carefully around seasonal trends.

By adding additional liquidity to the financial system, the Fed also helped fuel significant gains in the stocks, bonds, and housing and other assets.

With a rock-bottom interest rate, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.10% skyrocketed over 40%, while the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.12% jumped over 60% and the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP -0.18% gained over 80% between March 2020 and December 2021, according to Dow Jones Market Data. 

However, the central bank started quantitative tightening in June and also raised interest rates by 75 basis point rate hikes in three consecutive meetings . It marked the Fed’s toughest policy move since the 1980s to tame the hotter-than-expected inflation. 

See: This stock market rout looks like the dot-com bust of 2000, says investing guru

According to Druckenmiller, the Fed made mistakes on the risk-reward bet they made, and the repercussions of that are “going to be with us for a long, long time”.

 “We come up with this ridiculous theory of ‘transitory’, so we have 5 trillion in fiscal stimulus, we have 5 trillion in QE,” he said. “And if you remember, the monetary framework in the fall of 2020, they (Fed) were no longer going to forecast. They were going to be data-dependent and wait until they see the whites of inflation’s eyes. So guess what? They saw the whites of their eyes.”

U.S. stock indexes  drifted mostly lower on Friday  in choppy trade after an inflation reading showed inflation accelerated even more than expected in August. The S&P 500 was on track for a monthly decline of 7.9% at Thursday’s close, while the Dow Jones Industrial Average was down 7.2% and the Nasdaq Composite pushed its total monthly loss to 9.1%, according to Dow Jones Market Data. 

/zigman2/quotes/210598065/realtime
US : Dow Jones Global
34,429.88
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US : S&P US
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US : Nasdaq
11,461.50
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Volume: 4.59B
Dec. 2, 2022 5:16p
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