KKR & Co. sees potential trouble ahead, including a mild recession next year, with the Federal Reserve narrowly focused on driving up unemployment to tame inflation.

The central bank faces the risk of raising interest rates too aggressively while trying to balance the labor market, which will be slow to reflect the deterioration that’s already showing up in housing, retail pricing power and economic conditions abroad, Henry McVey, chief investment officer of KKR’s balance sheet, said in a note to investors. The U.S. labor shortage is so severe that it’s possible the Fed’s tightening doesn’t work, he wrote.

“This is a more draconian outcome than corporate profits falling,” according to McVey, “because it will encourage the Fed to tighten even further.”

KKR’s vast operations, with $491 billion of assets under management and 121 portfolio companies at midyear, give the firm a broad window into the state of the economy. It owns stakes in myriad businesses including healthcare, real estate, payments and pipelines, as well as a mail-order contact lens company and TikTok owner ByteDance Ltd.

There’s a 30 percent chance that persistent labor shortages will cause the Fed to raise rates into the high-4 percent or low-5 percent range over the next 12 months, according to McVey. New York-based KKR sees the federal funds rate potentially climbing as high as 5.13 percent next year, compared with the latest Fed estimate of 4.625 percent, the median projection of 19 Fed policy makers.

The private equity firm expects zero real GDP growth next year, compared with the 1.2 percent projected by Fed officials at their September meeting. Unemployment will rise to 4.9 percent in 2023, according to KKR, compared with central bankers’ median estimate of 4.4 percent.

Investors should put their money in collateral-backed assets such as real estate credit and infrastructure, McVey said, and credit is preferable to equities.

“The labor market is still too tight, inflation is still too high, and there is no quick fix,” McVey wrote. “We should expect earnings and valuations to come under pressure.”