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David Rubenstein says the Fed will settle for 'tolerable' 3% inflation, doesn't see imminent recession

“Their current public position is 2% – I suspect in time they’ll go to 3%,” he said. “We’ve had it for 25 years, but 3% is tolerable.”

Billionaire investor David Rubenstein is the latest Wall Street titan raising doubts about the Federal Reserve's ability to reach its current inflation goals.

"I think the Fed will probably target inflation down to about 3%, not 2%," the founder and co-chairman of private equity giant The Carlyle Group said in an interview with Yahoo Finance Live at the World Economic Forum in Davos, Switzerland Wednesday.

Rubenstein also had a notably more optimistic tone about the outlook for the economy than other corporate leaders, saying he's confident the U.S. central bank's policies to rein in inflation are working – just not enough to get price stability down to previous levels.

"Their current public position is 2% – I suspect in time they’ll go to 3%," he said. "We've had it for 25 years, but 3% is tolerable."

David Rubenstein, Co-Founder and Co-CEO of Carlyle Group, speaks during the Skybridge Capital SALT New York 2021 conference in New York City, U.S., September 13, 2021.  REUTERS/Brendan McDermid
David Rubenstein, Co-Founder and Co-CEO of Carlyle Group, speaks at the Skybridge Capital SALT conference in New York City, U.S., September 13, 2021. REUTERS/Brendan McDermid (Brendan McDermid / reuters)

The Fed currently targets inflation of 2% over the longer run as measured by the annual change in the price index for personal consumption expenditures.

December's Consumer Price Index (CPI) released Thursday showed inflation rose at an annual clip of 6.5% and decreased 0.1% over the prior month. Core CPI, which backs out food and energy, rose 5.7% over the prior year and 0.3% on a monthly basis — reflecting underlying stickiness in inflation.

Outside of his views on the direction of inflation, Rubenstein told Yahoo Finance he doesn't see a recession in the cards this year, even as many financial institutions forecast an economic downturn and cut costs to prepare for one.

"The numbers that we have and our own companies at Carlyle don't suggest that a recession is imminent," Rubenstein said. "I don’t really think it’s clear we’re going to go into a recession in the third or fourth quarter."

"It is clear that the Federal Reserve will increase interest rates again, probably in February and in March, but not by so much so that will put us in a recession," he added.

Federal Reserve officials are scheduled to hold their next policy meeting Jan. 31-Feb. 1 and deliver another rate increase. Markets are expecting a hike of 0.25%-0.50%.

A growing number of investors have pointed out factors which include a labor force still 3 million workers short of pre-COVID levels, companies moving overseas manufacturing closer to home to curb supply chain disruptions, and persistently high energy prices may make that goal far fetched.

Rubenstein's view is shared by prominent allocators including hedge funder Bill Ackman, BlackRock CEO Larry Fink, and Leon Cooperman, chairman and founder of family office Omega Advisors.

Ackman has previously said that a cohort of factors including de-globalization and a post-pandemic shift to domestic sourcing and production make 2% an unattainable goal, while Fink and his firm prophesied that investors will likely have to live with inflation around 3-4% and interest rates of 2-3%.

Cooperman, meanwhile, said earlier this month in a televised interview with CNBC that if the Fed attempts to hit 2% inflation rather than settling for 3% or 4%, the S&P 500 could fall to the low 3,000s.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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