Billionaire: The Fed won't say it out loud, but it really wants a higher unemployment rate

New York(CNN Business) For many years after the Great Recession, the Federal Reserve did everything in its power to lower the unemployment rate. Now, the central bank is trying to do the exact opposite.

David Rubenstein, the billionaire investor and co-founder of The Carlyle Group (CG), told CNN last week the Fed is actively rooting for the unemployment rate to go up to get inflation under control.

"He can't quite say this, but if the unemployment rate goes up to 4% or 5% or 6%, inflation will [probably] be tamed a bit," Rubenstein said of Fed Chairman Jerome Powell, whom he hired a quarter-century ago to work in private equity, "But he can't come out and say, 'I hope the unemployment rate goes up to 6%.' That doesn't sound politically very attractive to say that."

Fed officials have warned the jobs market is too strong right now and is contributing to the very high cost of living. To cool inflation, the Fed is increasing interest rates at the fastest pace in decades. The goal is to ease demand for workers, which would bring the jobs market more into balance and take pressure off prices.

The unemployment rate tumbled in July to 3.5%, tied for the lowest level since 1969. The jobless rate ticked up to 3.7% in August, but for a healthy reason: Hundreds of thousands of Americans got off the sidelines to actively look for work.

But a jump in the unemployment rate toward 6% would translate to a sizable wave of layoffs.

"There will be a lot of job losses. The Fed isn't going to publicly say, 'We want job losses,'" said Rubenstein, who interviewed leading investors for his new book, "How to Invest: Masters on the Craft."

Powell warns of 'pain' for Main Street

If the Fed tries to slow the economy to the point where inflation gets back down to its 2% goal, it would lead to the loss of 5.3 million jobs and the unemployment rate climbing to 6.7%, according to a recent analysis from RSM, an accounting and consulting firm.

Powell, in a high-profile speech during the Jackson Hole Economic Symposium last month, said the Fed will "forcefully" use its policymaking tools to get inflation under control -- a strategy that will bring "some pain to households and businesses."

"These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain," he said during his speech.

Some major companies, including Ford (F), Bed Bath & Beyond (BBBY) and Snap Inc., the parent company of Snapchat, have already disclosed major layoffs in recent weeks.

However, there is little evidence that layoffs are becoming more widespread. Weekly jobless claims declined last week to a two-month low. The number of job cut announcements made through August is the lowest year-to-date total since 1993, according to outplacement firm Challenger, Gray & Christmas.

Recession worries

Nonetheless, economists continue to warn the US economy is at an elevated risk of a recession, if not this year then in 2023 and 2024.

"Nobody knows for certain, and I don't like to use the word 'recession,'" said Rubenstein. "When I worked in the White House under President Carter, the inflation adviser there was told not to use the R-word. Recessions scared people. So he came up with another word: banana."

The Carlyle co-founder said he doesn't know if the economy is going into a "banana" or not -- but it won't be the end of the world if it does happen.

"We're not likely to go into a deep recession like we had in '07-'08. I don't see signs of that," Rubenstein said. "And it's not a depression. You know, it'll be a modest recession, if it occurs. I don't know if it will occur."

Markets may not have bottomed yet

Rubenstein noted that economic downturns present opportunities for investors who can buy good companies at deep discounts.

"There's always going to be recessions, but that's when great fortunes are made," he said.

Rubenstein isn't confident the worst is over for US stocks, which plunged into a bear market in June but have since bounced back. Still, he stressed it's very difficult to precisely time the market and suggested investors shouldn't waste too much time trying.

"I don't think we've hit the bottom, the absolute bottom, but we're kind of close near the bottom in some technology areas," Rubenstein said. "You never know when it's really bottom. But if it goes down another 10%, what difference does it make? If you buy something now and it goes down 10% and then later goes up 30%, what difference would it make if you hit the bottom of the market?"

Moving the inflation goalposts would 'scare' people

Even though recent indicators show inflation is starting to cool off, Rubenstein cautioned it will take "years" before inflation gets back down to the 2% level the Fed is seeking.

"I don't think you can raise interest rates high enough that you're going to get the inflation rate down very quickly. It takes a while, particularly when we have a war in Ukraine," he said. "The Fed recognizes that once you have inflation in the system, as Paul Volcker has said, it's very difficult to get it out."

Some economists have suggested the Fed could move the goalposts on inflation, revising its 2% inflation target to the more attainable level of 3%.

Rubenstein, however, does not think that's likely anytime soon.

"That would scare the markets," he said. "They would say, 'That means the Fed doesn't think it can get to 2%. That means inflation is going to be higher for awhile.' That would scare people."

Powell and his colleagues at the Fed insisted inflation would be "transitory," before conceding late last year that wouldn't be the case. Russia's invasion of Ukraine made matters worse this spring, sending food and energy prices skyrocketing.

Rubenstein praised Powell as a "very smart, hardworking person" but said the Fed chair (and others) "underestimated" how bad inflation would be.

"We sometimes think that the chairmen of the Fed are people who are gods," Rubenstein said. "Alan Greenspan was almost a god. Paul Volcker was almost a god. But these people put their pants on one leg at a time. They make mistakes."