The Federal Reserve is in the spotlight this week as investors look for signs that the U.S. central bank has concluded its season of raising interest rates for good as the economy improves.
But a stubbornly resilient job market could foil those plans as the Fed uses higher interest rates as a tool to “cool down” a hot economy and dissuade the spending that has helped fuel the inflation that has become endemic in America over the past few years.
Related: Stock Market Today: Big Tech leads Nasdaq higher, Treasuries rally on cooling jobs data
But the Fed’s function as the thermostat for the economy has turned the bank into something else altogether, according to economist and former World Bank Group President David Malpass.
“It’s worrisome. The Fed has basically become now a giant hedge fund. It’s lost a trillion dollars and counting. It’s going to be a gigantic loss,” Malpass told CNBC’s Squawk Box on Dec. 5 when asked about the Fed’s role in the economy.
“What it does is borrow money at 5.4% from banks and then dumps it into government bonds. So think what that trade does. It causes the government to think that it’s better off than it is and that encourages the government to be short when rates were zero.”
The Bureau of Economic Analysis’ PCE Price Index is the Fed’s preferred gauge for inflation. In October, that index slowed to a 2-1/2-year low, leading many market watchers to bet that the bank will begin cutting interest rates next spring.
Soft jobs data released Dec. 5 also bodes well for the Fed cutting rates. The number of open positions in October fell to an 18-month low of 8.7 million, alleviating the pressure of higher wages for employers.
Check out Malpass’ full comments below.
“The Fed has become a giant hedge fund. It’s lost a trillion dollars and counting,” says Former President of the World Bank Group, @DavidRMalpass. “We have multiple problems going on and it endangers the dollar.” pic.twitter.com/IcC2JkPHZy
— Squawk Box (@SquawkCNBC) December 5, 2023
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