(Bloomberg News) Policy makers seeking to rescue the U.S. economy are wrong to worry about the threat of inflation and should heed Warren Buffett's call for higher taxes on the wealthy, according to Don Brownstein, manager of last year's top-performing hedge fund.

Some Federal Reserve members and lawmakers, acting the part of "modern day 'Know-Nothings,'" have been "raving about imaginary uncontrolled inflation and wringing their hands over government deficits," Brownstein, whose Structured Portfolio Management LLC manages about $2 billion of assets, wrote last week in a letter to investors.

"My viewpoint is, that's stupid: It has nothing to do with what we know from economic theory or economic fact," Brownstein said yesterday in a telephone interview. "Right now, we really don't have any inflation," he added. "So worrying about it is like worrying about something like the bogeyman."

The Fed has room to use additional asset purchases to stimulate the economy and create moderate inflation to aid indebted consumers, as Chairman Ben S. Bernanke signals he's ready to spurn "inflation-obsessed fanatics," Brownstein wrote in the Aug. 16 letter. Lawmakers shouldn't "freak out" about deficits with the economy weak, he wrote after gross domestic product grew at a 1.3 percent annual rate last quarter to cap the worst six months since a recession ended in June 2009.

Jackson Hole

U.S. stocks rose today, with the Standard & Poor's 500 Index jumping 1.2 percent at 11:27 a.m. in New York, as investors speculated that Bernanke may signal the Fed will act to spur the economy as central bankers meet this week in Jackson Hole, Wyoming. Gold futures topped $1,900 an ounce for the first time yesterday, as investors seek protection from inflation and following Standard & Poor's Aug. 5 downgrade of the U.S. to AA+.

The letter also disclosed his Stamford, Connecticut-based firm's first-half returns and plan to start a fund focused on investments tied to rental units.

Brownstein's main SPM Core fund, composed of three separate funds, returned 14.7 percent through June, according to the letter. He joined managers including Metacapital Management LP and Providence Investment Management LLC with focuses in investments linked to mortgage repayment speeds that bested hedge funds' average gain of 4.4 percent, Bloomberg data show.

His SPM Macro: MVPQ fund gained 8.2 percent after opening in March, the letter showed. That fund, whose name references a mathematical equation about the relationship between the supply of money and economic growth, is "designed to produce positive carry while waiting for the results of 'accommodative' monetary policy to take effect," according to the letter.

Best Performer

Brownstein's Structured Servicing Holdings LP, the part of his Core fund group that focuses on mortgage debt lacking government backing, returned 8 percent in the first half, his letter showed. The strategy's gain of 50 percent in the first 10 months of 2010 put it at the top of Bloomberg Markets' list of the 100 best-performing funds managing $1 billion or more.