The Fed 'risks being too fast to act' with more hikes going forward, tech investor says
Traders are betting the Federal Reserve’s 0.5% rate increase today is far from its last this year.
Fed funds futures are pricing in hikes of varying sizes for the next five meetings, and Fed officials themselves have endorsed that view — and suggested again today in their statement — that increases will continue.
But what if the U.S. economy isn’t strong enough to withstand those rate increases and the Fed is forced to stop?
“The Fed was too slow to act when the economy was growing, and now it risks being too fast to act when the economy is slowing,” Josh Wolfe, co-founder and managing partner at Lux Capital, told Yahoo Finance Live (video above). As a result, Wolfe, whose firm invests in emerging science and technology startups, said today's announced rate increase might be "one and done."
Wolfe isn’t alone in criticizing the central bank for waiting too long to begin to raise rates. But his view that today’s increase could be followed by a pause, as he pointed out in a tweet, is far outside the consensus.
Here's why I think contra to 100% consensus of many rate hikes that we may be ONE + DONE
Fed was too SLOW to act when all was GROWING
Fed is now too FAST to act now when all is SLOWING pic.twitter.com/nHCU4G8MPm— Josh Wolfe (@wolfejosh) May 4, 2022
From FOMO to 'shame of being suckered'
Economic growth is already slowing in the U.S. as the Fed tightens monetary policy, which has raised fears of a so-called “hard landing.”
First-quarter gross domestic product unexpectedly contracted in the first quarter. The Citi Economic Surprise Index, which measures how well economic indicators are doing versus economists’ expectations, has been falling – although it’s still not negative. And just hours before the Fed made its latest rate decision, private payrolls rose less than forecasts expected while a measure of the services portion of the economy missed estimates, with prices paid rising to a record high.
Although Fed officials stuck to their “inflation is transitory” stance throughout 2021, that latter piece of data is yet more evidence that inflation is indeed not transitory. Still, Wolfe isn’t confident that rising rates will solve the issue.
“Demand was pulled forward during COVID, and people don’t need their extra Peloton, they don’t need more clothes, they don’t need another computer," Wolfe said. “They basically pulled forward years of demand. And I think we've got a time where you've got 11.5 million open jobs. It looks like we have full employment.”
Wolfe is a venture capitalist, not an economist or a rates trader. And he admits the Fed’s years-long accommodative monetary policy has been good for his business, even as the excesses it caused have made the private markets even frothier than public ones at times.
“You have these 20-year far-out, fanciful ideas that became these 20-month, frenzied projects,” he said. “Now you see this excess and exaggeration and the absurdity and frauds starting to come out in the tech world.”
That said, Wolfe noted that sentiment is shifting — from far-out speculation to capital preservation and from FOMO to duck and cover — and that’s a sign the Fed needs to tap the brakes.
“If we went from fear of missing out and shame of being suckered," he added, "now you have the pleasure – or the pride – of losing less.”
Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9am-11am ET. Follow her on Twitter @juleshyman, and read her other stories.
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