Citadel boss Ken Griffin warns a recession is looming - as household savings dwindle and surging interest rates bite

• Ken Griffin expects a recession as household savings dry up and surging interest rates choke growth.
• He blamed historic inflation on the pandemic savings glut being spent after the US economy reopened.

Americans are burning through their pandemic savings, and soaring interest rates are threatening the housing market and other parts of the economy. That's a recipe for a downturn, Ken Griffin told Bloomberg on Tuesday.

"We have the setup for a recession unfolding," the billionaire investor and Citadel founder said.

Griffin explained that during lockdowns in early 2020, many Americans kept their jobs by working from home, but still received stimulus checks from the government.

However, travel was restricted and casinos, restaurants, and other entertainment venues were closed. Consumers had limited ways to spend their spare money, and ended up saving a big chunk of it.

They began spending freely once vaccines were rolled out and the economy reopened in 2021, resulting in a historic spike in inflation last year, Griffin continued.

The sudden surge in price growth meant some workers saw wage declines in real terms, and retirees and other people on fixed incomes struggled to make ends meet, he added.

"It was a pretty traumatic experience for American households," Griffin said, describing it as a "particularly horrific year."

Consumers still have an estimated $1 trillion of excess savings left over, but they're spending upward of $100 billion each month, Griffin said. That leaves them on track to exhaust their pandemic cash hoard in a matter of months.

"At the end of this year, in some sense, the punch is out of the bowl," he said, as the "post-pandemic orgy of spending comes to an end."

"Then we'll see the true strength of the economy," he added.

When household savings dry up, consumer spending is likely to slump, curbing inflation and weakening growth, Griffin said.

Inflation, interest rates, and the Fed

Inflation spiked as high as 9.1% last summer, spurring the Federal Reserve to hike interest rates from almost zero to upward of 4.5%.

Higher rates can relieve upward pressure on prices by encouraging saving over spending and increasing borrowing costs. However, they can also drag down the prices of stocks, houses, and other assets, as well as sap demand, boosting the odds of a recession.

Rates are likely to peak in the mid-5% range then fall sharply next year, and inflation will eventually retreat to just above the Fed's target rate of 2%, Griffin said. While the blowout employment report in January was a surprise, he still expects to see evidence of a slowdown in February.

"That'll give the Fed a bit of comfort that they're getting the job done, cooling the economy, bringing down inflation and putting that pretty evil inflation genie back in the bottle," he said.

The hedge fund manager underlined the difficulty of the Fed's challenge, as it navigates "uncharted territory" wielding a blunt instrument in the form of interest rates.

"It's like having surgery with a dull knife," he said. "It's a really difficult tool to get the job done with."

Griffin noted the Fed's hikes and cuts have a big impact on rate-sensitive sectors such as housing and manufacturing, but barely touch other parts of the economy. He also emphasized that rates act with a significant lag, making it tricky to gauge the scale and timing of their effects.

Even so, Griffin called for the Fed to be clearer and more consistent in its inflation messaging, and make sure to dash any unfounded hopes of an imminent pivot to cutting rates.

"Every time they take the foot off the brake — or the market perceives they're taking their foot off the brake — and the job's not done, they make their work even harder," he said.