The Federal Reserve is risking its credibility by keeping its policies so loose and allowing inflation to grow in ways that may not be temporary, billionaire hedge fund manager Paul Tudor Jones told CNBC on Monday.
This week could be “the most important meeting in [Chairman] Jay Powell’s career, certainly the most important Fed meeting in four or five years, “said CNBC’s Jones Andrew Ross Sorkin during a” Squawk Box “interview.
That statement comes even though the Federal Reserve’s Monetary Open Market Committee is not expected to change its approach to near-zero interest rates or its $ 120 billion monthly asset purchase program.
The Fed’s bond purchase program should provide liquidity and keep interest rates low during the pandemic.
When the two-day session ends on Wednesday, the market expects most Fed officials to grapple with the idea of when to withdraw their bond purchases.
“The reason why [the meeting is so important] is because we had so much inbound data that challenges both their mission and their model, ”said Jones. “So how you react to it will be extremely important, and I think for investors how they should handle their portfolios in the future.”
In particular, Jones said successive consumer price index values are exerting price pressures well above the Fed’s 2% inflation target. However, Fed officials continue to insist that current readings are temporary and unlikely to persist.
“It’s an intellectual mismatch that risks damaging their forecasts if they’re wrong on inflation,” he said.
He also cited recent trends showing a record 9.3 million jobs are available, a development he said could enable the Fed to “declare victory” on its employment mandate.
“At the same time, we’re running quantitative easing instead and juicing an already glowing economy,” said Jones.
Any Fed easing has come with more than $ 5 trillion in incentives from Congress and the possibility of even more infrastructure spending.
The consumer price index for May showed a 5% rise in headline inflation annually, the fastest since the financial crisis, while core inflation rose the fastest since 1992.
“You have the craziest mix of fiscal and monetary policy since the Federal Reserve Board was founded,” said Jones.
“It turned economic orthodoxy on its head, and that’s why this meeting is so important. Things are actually insane,” he added. “At some point we have to say: ‘Okay, let’s slow down. We’ll get back on track and drive like we used to.'”
The investment impact is important, he said.
In particular, Jones pointed to the rise of SPACs or specialty acquisition companies, as well as the rise in Bitcoin and gold prices, while the stock market is also hovering around record highs.
The Fed’s messages on inflation will be crucial to the way forward, he said.
“If you treat these numbers with nonchalance, then in my opinion it’s just a green light to bet on any inflation trade,” said Jones.
Become a smarter investor with CNBC Pro.
Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.
Sign up to start a free trial today.