Reasons why the Fed does not need to raise interest rates further

The Federal Reserve has failed to achieve its goal of reducing inflation without harming the economy, according to real estate tycoon Barry Sternlicht. The Fed needs to stop raising interest rates because inflation is already well below target.

The CEO of Starwood Capital Group - who has been a critic of the Fed over the past year - has pointed out the current risks facing the US economy.

Many experts have warned of a recession when interest rates in the US hover above 5%. Globally, central banks have raised interest rates sharply over the past 18 months to reduce inflation. But Mr. Sternlicht argues that these agencies do not need to tighten policy further, because some inflationary pressures from the pandemic have begun to fade.

Economists say the price spike was partly due to demand outstripping supply over the past few years. However, that appears to be reversing as consumers exhaust their excess savings and are expected to cut back on spending soon.

“The economy is going to slow down on its own,” said billionaire Sternlicht. “So if Chairman Powell continues to raise rates as quickly as he has, it’s just adding fuel to the fire.”

Statistics show that inflation in the US may be at or below the Fed's 2% target. The reason is that housing prices - the largest component of the Consumer Price Index report - have lagged behind official statistics by about 18 months.

Single-family home rents in the U.S. rose just 3.3% year-over-year, the slowest pace of growth since the pandemic, according to CoreLogic data. Housing prices below the CPI suggest inflation has fallen below 2%, Sternlicht noted.

Lower inflation is good news for consumers but could spell trouble for high interest rates. Over-tightening risks tipping the U.S. economy into recession, while Fed officials have warned that rates could stay high for longer.

“Powell should just be patient,” billionaire Sternlicht warned. “The Fed should stop, because they are hurting the US balance sheet. The economy will slow down.”

Sternlicht has repeatedly sounded the alarm about a U.S. recession over the past year. He has previously said that excessive rate increases could also trigger a “Category 5 storm” for the commercial real estate industry because higher borrowing costs would leave companies saddled with debt.

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