Billionaire investor George Soros said today the US Federal Reserve might overshoot in its bid to tighten monetary policy, deflating housing prices and tipping the economy into recession in 2007.
A collapse in US housing prices could be associated with a dollar decline, scuppering the Fed's attempt to engineer a "soft-landing" for the economy, Mr Soros told an audience at the Singapore Institute of International affairs.
Mr Soros - best known for his famous bet against sterling as Britain was forced to pull its currency out of the European currency grid in 1992 - said he expected the federal funds rate, now at 4.25 per cent, to peak at 4.75 per cent.
Nevertheless, the Fed could be late in estimating when to stop raising rates, he said, creating a "reasonably significant chance" of a "hard-landing".
"If housing continues to cool while rates are slowing then it could turn into a hard landing," Mr Soros said. "That's why I expect a recession to happen in 2007, not 2006."
The Fed has raised its key rate at each of its policy meetings since June 2004, but has indicated the tightening cycle is close to peaking.
Although economies in Europe and Japan are recovering from slowdowns, they may not be in a position to counterbalance the the impact of a US recession, he said. Besides, Japan's economy could slow down if the Chinese economy slows.
"Europe is growing relatively well . . . but a hard landing in the US will be associated with a decline in the dollar which would hurt the European economy," he said.
Mr Soros said he believed the US housing bubble, a major factor behind strong US consumption, had reached its peak and was in the process of being deflated. A way to tackle an ensuing global slowdown would be to stoke domestic demand in Asia and other developing regions, he said.
He suggested an International Monetary Fund proposal for richer countries to donate their Special Drawing Rights (SDR) to poorer countries would be a way to stimulate that demand.
The investor turned philanthropist, said the world economy faced two other significant risks - the US-led war on terror and global warming. He argued the war on terror and the war in Iraq had turned global opinion against the world's most powerful country.
Mr Soros said global warming threatened humankind and should be tackled by penalising carbon emissions instead of the current system of rewarding companies that reduce pollution.