The Federal Reserve has been aggressively raising interest rates in hopes of cooling the economy and taming inflation, which remained near a 40-year high in August at 8.3%.
And now some of Wall Street’s most famous minds are making the case that the Fed doesn’t have the tools it needs to truly tame inflation.
While central banks can act to slow the demand side of the economy, their policies don’t have much effect on the supply of goods, services, or workers. And many economists and top investors argue that increased domestic production of scarce goods and commodities, coupled with an expanding workforce, is an important part of the inflation puzzle.
On Thursday, Bill Ackman, the CEO of Pershing Square Capital Management, made the case that immigration, not the Fed, could be the solution to inflation, striking a very different tone from his hawkish comments just months ago urging central bank officials to raise rates.
“Inflation can be mitigated by reducing demand and/or by increasing supply. The Federal Reserve can only reduce demand by raising rates, a very blunt tool,” Ackman wrote in a tweet. “Doesn’t it make more sense to moderate wage inflation with increased immigration than by raising rates, destroying demand, putting people out of work, and causing a recession?”
The billionaire investor, who is known for his heated debates with fellow Wall Street titan Carl Icahn, proposed using Russian immigrants to help reduce upward pressure on wages.
“If we can target immigration policy to achieve important political objectives like catalyzing a Russian talent drain to the U.S., why shouldn’t we?” he wrote.
“Let’s remove the barriers for Russia’s brightest. The most talented Russians must leave now before they become fodder in an unjust war. Doing so saves our economy and destroys Russia’s future,” he added in a separate tweet.
Ackman’s comments came after Russian President Vladimir Putin ordered the mobilization of 300,000 reservists to fight in the Ukraine war on Wednesday, leading thousands of Russians to flee the country. Russia had already been experiencing a serious talent drain, with roughly 4 million Russians heading for greener pastures in the first three months of 2022 alone. Ackman argues that the U.S. should be willing to take in at least some of these disaffected Russians, to help boost our workforce and combat inflation.
To Ackman’s point about immigration potentially lowering inflation, a National Bureau of Economic Research study by Harvard economist George Borjas found that rising immigration reduced the wages of competing domestic workers, which can have a cooling effect on inflation.
And researchers from the Federal Reserve Bank of Kansas City explained in a May article that when immigration slows, it can increase wages domestically and exacerbate inflation.
While it may sound counterintuitive for economists and investors to advocate for more immigration to slow wage growth, their fear is that a wage-price spiral—where inflation-induced wage increases contribute to company costs, which then raise prices even more—will ultimately make inflation impossible to control.
Olivier Blanchard, the IMF’s former chief economist, said just last week that he believes the U.S. is already experiencing a wage-price spiral, and he warned that stopping the trend will likely require significant job losses.
A big shift
Ackman’s latest comments about the Fed stoking a recession with its rate hikes represent a seismic shift in his thinking over the past few months.
Back in June, the billionaire called on the Fed to get “aggressive” with a 75-basis-point interest rate hike, arguing that the institution was losing credibility because of officials’ unwillingness to fight inflation.
Ackman got his wish. The Fed raised rates by 75 basis points in June, then went ahead with two more 75-basis-point hikes in July and September, marking the fastest pace of U.S. monetary policy tightening since the 1980s.
But now, with the S&P 500 down more than 10% just this month, and more and more economists claiming a recession is imminent, Ackman is warning that the Fed may be overdoing it.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.