(Business Insider) A rise in inflation is among the biggest risks to financial markets today, and the Federal Reserve could miss critical warning signs, the hedge fund billionaire Ken Griffin said Thursday.
Inflation has remained relatively stagnant for years, rarely landing above the Fed's 2% target or low enough to drive fears of price deflation. Markets have generally priced in a lack of rapid inflation, leaving the US with "absolutely no preparedness" for such a jump, Griffin, who founded the $32 billion hedge fund Citadel, said at The Economic Club of New York.
"If there were inflation, the markets are utterly and completely unprepared for that," Griffin said.
The Citadel founder recalled when his fund pored over Fed minutes in the months before the central bank began raising interest rates. The minutes lacked any signs of rising inflation just six months before the Fed initiated upward rate adjustments, revealing "even our most well-informed policymakers" could miss inflation warnings, Griffin said.
The central bank's preferred metric, the personal consumption expenditures price index, currently sits at 1.6% and is expected to rise only to 1.7% over the next decade. A trio of rate cuts through the second half of 2019 helped deliver economic stimulus during the peak of the US-China trade war, but the Fed has since signaled it won't adjust its benchmark rate further until inflation meets its target.
Griffin also pointed to the coronavirus outbreak as "probably the most concrete short-run risk we see in the financial markets globally." Several major companies have already faced supply-chain hurdles, lowered forward guidance, or closed hundreds of stores in response to the epidemic, and the virus has accelerated its infection rate through February.
The founder noted that containing the outbreak would be "a challenge for the world to navigate" and specified that it could also cut into China's ability to meet its obligations in the phase-one trade deal with the US. China agreed to boost its imports of US goods by $200 billion over the next two years, but the coronavirus has dented demand.
Griffin said the White House should empathize with China's situation and allow leniency in enforcing the month-old trade agreement.
"I hope the administration takes the high road here and understands that the Chinese are grappling with what is the tip of the spear of a global health crisis, and we make good, thoughtful decisions on how to navigate that," he said.
Griffin is worth $15.5 billion, according to the Bloomberg Billionaires Index.
