The Fed 'screwed up' by letting zero interest rates go on for too long, billionaire investor Sam Zell says

• The Fed 'screwed up' by letting zero interest rates go on for too long, said real estate investor Sam Zell.
• When you spread out free money for years, you create a significant drag, the billionaire told CNBC.

The Federal Reserve's mistake when it came to fighting record-high inflation was not acting fast enough and letting zero interest rates linger for far too long, according to real estate investor Sam Zell.

The billionaire told CNBC he's not on board with the apparent market rethink on recession, that the US economy could avoid taking damage from the central bank's aggressive interest-rate hikes.

"The Fed screwed up by allowing zero interest rates to go on for too long. I think we're just beginning to pay the price for that," Zell said in the interview Wednesday.

"When you spread out free money for years at a time, you create significant drag," he added. "And I just don't see how the US can avoid an economic slowdown as that whole process comes to an end."

The Fed has hiked interest rates from almost zero to nearly 5% within the past year in response to inflation running at historic highs, and it expects to lift them even higher in the coming months.

Higher rates can curb price growth by making borrowing more costly, and they can encourage people to save rather than spend and invest. But they can also crimp demand and sap economic growth.

After a losing 2022, US stocks have risen in the early going of this year, as investors push back against an assumption the Fed will keep to rate hikes. The benchmark S&P 500 US equity index has climbed just over 8% and the tech-heavy Nasdaq Composite has rallied over 15% year-to-date.

The US labor market is tight and inflation has been moderating, with January's reading coming in at 6.4% — the lowest level in over a year. That's boosted some investors' hopes that the Fed can pull off a soft landing, and bring inflation down without the US slipping into a recession.

Responding to the suggestion the Fed will get lucky with getting inflation down to its 2% target, given it's cooling, Zell pushed back.

For him, the definition of inflation cooling shouldn't be coming down from 9% to 6%. "The point is, 6% is a serious problem," he said.

"It would be nice to say that it would be great if the Fed got lucky. I've been around for 50 years and I've never seen the Fed get lucky," Zell said, adding all he's seen the central bank do is make the mistake of acting too slow.

The billionaire property investor said the stock market has a long track record of getting over-excited about any positive or negative signal, and that's not good.

He also said preparing for disinflation is a very optimistic thing to do at this point. "It's going to take a while for the inflation pressures to ease, and I think that's what we have to look forward to."

In November, the property investor already criticized the Fed's delayed response to inflation, but he praised the central bank for finally doing all the right things by aggressively hiking interest rates. He predicted then the US would enter a recession.