Shark Tank star Kevin O’Leary has predicted ‘real chaos’ in the US economy within months.
He said rising interest rates and mortgage costs pose a major threat to households and small businesses. America is headed towards a ‘rebalance’ after huge investment in the country’s largest companies while small and mid-sized firms have been neglected, he said.
Inflation is currently 3.2 percent and Fed chair Jay Powell warned last week that the central bank has not ruled out further interest rate hikes to bring it down further. The rate is currently 5.5 percent.
The Fed‘s aggressive rate hikes campaign has pushed the average rate on a 30-year fixed mortgage 7.09 percent, the highest in 22 years.
O’Leary, 69, told Fox’s Kudlow: ‘This gets worse before it gets better. And what’s it doing to small business? Killing them right now.’
He added: ‘What I anticipate is going to happen here, while we still have full employment which is remarkable, and you don’t put any capital into the small business sector, which is 60% of the jobs in America, you’re going to start to see some real chaos come September, October, November. This is an issue for Congress, Larry. It’s very simple.’
O’Leary said the government ‘gave all their money to S&P 500 in two acts, the Chips and Science Act and the other, Inflation Reduction Act’.
‘Not a dime for small business,’ he said. ‘A trillion for the big boys, nothing for the small guys. And the small guys, they run America, so it has to be rebalanced somewhere, Larry.’
The US economy has remained resilient despite high interest rates, a period of high inflation, and warnings of a looming recession.
Unemployment is around 3.5 percent, one of the lowest levels in 60 years.
But Federal Reserve chiefs have not ruled out further interest rate hikes which could squeeze debt-dependent US households. A rising rate pushes up the cost of mortgage payments and credit card debt.
Federal Reserve Chair Jerome Powell has warned that the continued resilience of the US economy could require further interest rate increases.
Powell noted in his speech on Friday in Jackson Hole, Wyoming that the economy has been growing faster than expected and that consumers have kept spending briskly – trends that could keep inflation pressures high.
He also reiterated the Fed’s determination to keep its key rate elevated until annual price increases are reduced to the central bank’s 2 percent target.
‘We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,’ the Fed chair said.
His speech – at an annual conference of central bankers – highlighted uncertainties surrounding the economy and the complexity of the Fed’s response to it.
That marked a sharp contrast to his remarks from Jackson Hole a year ago, when he bluntly warned Wall Street that the central bank was going to continue its campaign of sharp rate hikes to rein in spiking prices.
Powell also said the Fed believes its key rate is high enough to restrain the economy and cool growth, hiring and inflation. But he said it is hard to know how high borrowing costs have to be to restrain the economy, ‘and thus there is always uncertainty’ about how effectively the Fed’s policies are in reducing inflation.
As a result, the Fed ‘will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,’ Powell said.
The Fed chair’s speech in Jackson Hole comes at a time of heightened uncertainty about the economy and interest-rate policies.
Businesses are still hiring, and consumer spending has remained resilient even while inflation has eased to 3.2 percent, down from a peak of 9.1 percent in June 2022.
At the same time, ‘core’ inflation, which excludes volatile food and energy prices, has remained elevated at 4.7 percent despite the Fed’s streak of 11 rate hikes beginning in March 2022.
And by raising its key effective rate from near zero to a 22-year high of 5.33 percent, the Fed has made borrowing much more expensive for consumers and businesses.
Soaring mortgage rates, for example, have contributed to a 22 percent drop in home sales through the first seven months of 2023 compared with the same period last year, causing a potential headwind for the economy.
Though overall inflation has steadily dropped, the mixed economic picture has in some ways left Powell in a tougher position than he faced in Jackson Hole last year, when he delivered a blunt warning about the Fed’s plans to keep rapidly raising rates to fight inflation.
Now, the Fed faces a more subtle challenge: How to navigate a narrow path requiring it to slow growth and further cool inflation without derailing the economy and causing a recession. Economists call this rare outcome a ‘soft landing.’
Many analysts say that despite the progress the Fed has made so far, Powell can’t afford to let down his guard and say anything that would sound like a declaration of victory.
They instead expect him to signal that he intends to keep rates at high levels for as long as needed. Even if the Fed’s policymakers don’t further increase borrowing costs, they’re unlikely to reduce them anytime soon.
A year ago in Jackson Hole, Powell had warned that the Fed’s coming rate hikes would ‘bring some pain to households and businesses,’ likely in the form of job losses and potentially a recession.
Raghuram Rajan, an economist at the University of Chicago and a former head of India’s central bank, suggested that if Powell is tempted this year to swing the other way and predict a ‘painless disinflation,’ he should avoid doing so.
‘The notion that we’ve shifted from a painful disinflation to painless disinflation would undercut the Fed,’ Rajan said. ‘It would suggest they don´t have the stomach’ to do what’s needed to tame inflation.
Surprisingly, despite the Fed’s aggressive rate hikes, the U.S. unemployment rate stands exactly where it did when Powell spoke last year: 3.5 percent, barely above a half-century low.
Still, Rajan said he doubts the Fed can achieve its 2 percent inflation goal without causing some rise in unemployment. A higher jobless rate would likely slow wage growth and ease inflation pressures. When layoffs spread, workers are typically less able to gain big pay raises.
In an interview this week, Raphael Bostic, president of the Federal Reserve’s Atlanta branch, said he favors keeping the Fed’s key rate at its current level at least well into next year.
In June, when the 18 members of the Fed´s rate-setting committee last issued their quarterly projections, they predicted that they would raise rates once more this year.
That expectation might have changed in light of milder inflation readings the government has issued in recent weeks. The Fed’s policymakers will update their interest rate projections when they next meet Sept. 19-20.
‘We are just going to have to stay restrictive for quite a while,’ Bostic said, ‘until we are sure, sure, sure, sure, sure, sure that inflation is not going to bounce off and bubble up far away from our target.’
Bostic said he thinks the Fed´s benchmark rate is currently high enough to restrain the economy and cool inflation over time. But he added that he isn’t ‘even contemplating a cut until the latter part of 2024.’
Another key figure at the Jackson Hole conference – Christine Lagarde, president of the European Central Bank – will deliver a speech on Friday as well. Analysts expect Lagarde to seek to keep the ECB’s options open at its next meeting in September. Investors increasingly expect the ECB to refrain from a rate hike at that meeting.
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