Billionaire venture capitalist Chamath Palihapitiya believes that the Federal Reserve did the worst thing possible by raising interest rates by 25 basis points amid the crisis in the US financial system.
In a new episode of the All-In Podcast, Palihapitiya says that the Fed should have hiked interest rates by 50 basis points, which he notes might trigger panic in the short term but would have eventually exposed what’s fundamentally broken in the system.
According to the venture capitalist, the Fed can deal with the chaos that comes from imposing higher interest rates, but they don’t have the appropriate tools that can handle inflation running amok.
“I think they should have raised 50 [basis points]. It would have created a little bit more chaos in the short term, but it would have set us up to understand what was fundamentally broken and still give the Federal Reserve the ability to use their balance sheet and use liquidity in the future to solve the problem.
They took the worst option, which is neither did they cut nor did they raise enough… I think it’s high time that we acknowledge that we have a sticky inflation problem whose back we have to break. We’ve known since the Volker era what we need to do to do that, which is you need to get interest rates to be greater than terminal inflation, which means 5% Fed funds rate is insufficient. So we’re going to need to see a print of 5.5%, 5.75%.
That’s when you’re going to have enough contraction, and then the Fed can come back with liquidity.”
Currently, the Fed funds rate stands at 4.5% to 4.75%. Palihapitiya says that the Fed’s ambivalence to take interest rates higher could actually hurt the economy.
“But if they don’t take these steps, we’re going to be in this very choppy neither here, neither there situation. And I think that is what causes the real damage because it’s the corrosive effects of uncertainty and what that does to lending, to risk taking, and I think that’s really bad for the economy.”
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