Bloomberg News

Einhorn Says Fed Rate Stance ‘No Longer Useful,’ Risks Inflation

May 01, 2012

Hedge-fund Manager David Einhorn

David Einhorn, president of Greenlight Capital Inc. Photographer: Jonathan Fickies/Bloomberg

Hedge-fund manager David Einhorn said Federal Reserve policy intended to stimulate the economy and create jobs is “no longer useful” because it risks inflation.

Investors including Pacific Investment Management Co.’s Bill Gross have said Fed policy makers may be adding the risk of future economic disruption. The central bank has kept interest rates near zero since late 2008.

Einhorn, whose hedge fund can bet on the rise or fall in equity prices, has been adjusting investments he oversees for Greenlight Capital Re Ltd. (GLRE:US), the Cayman Islands-based reinsurer where he is chairman. He boosted bullish bets in stocks last month as corporate profits improved and beat earnings expectations, he said on a conference call with investors today.

“This enthusiasm is tempered by our continued concern about the structural sovereign-debt problems in Europe and Japan, a slowing Chinese economy, and high oil prices and general inflation connected to the Fed’s continued insistence on maintaining an emergency zero percent interest-rate policy, which we believe is no longer useful or effective,” Einhorn said on the call.

Fed policymakers, led by Chairman Ben S. Bernanke, reiterated their view April 25 that conditions may warrant “exceptionally low levels” for rates through at least late 2014. The central bank has kept its target federal funds rate between zero and 0.25 percent since December 2008.

Investment Portfolio

Greenlight Re’s investment portfolio returned 6.5 percent in the first quarter, compared with a 3.4 percent loss in the year-earlier period, according to a statement from the reinsurer. The portfolio’s net-long position rose to 39 percent in April from 32 percent at the end of March, Einhorn said on the call. The hedge fund manager added short bets, in which he wagers that securities will decline, in the first three months of the year as the market rallied.

The reinsurer posted net income of $65.1 million in the first quarter, compared with a net loss of $43 million a year earlier, according to the statement.

Gross, who oversees the world’s largest bond fund, said in a monthly investment outlook posted on Newport Beach, California-based Pimco’s website today that Fed policies including debt purchases will cause “gradually higher rates of inflation.”

The “acceleration of credit via central bank policies will likely produce a positive rate of real economic growth this year for most developed countries, but the structural distortions brought about by zero-bound interest rates will limit the growth,” Gross wrote.

Einhorn and his hedge fund Greenlight Capital Inc. are known for shorting Lehman Brothers Holdings Inc. before it collapsed in September 2008.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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Companies Mentioned

  • GLRE
    (Greenlight Capital Re Ltd)
    • $33.63 USD
    • -0.44
    • -1.31%
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