Bill Ackman Explains Why Inflation, Not Fed Rate Hike, Is Biggest Threat To US Economy

Billionaire hedge fund manager and CEO of Pershing Square Holdings Ltd. PSHZF Bill Ackman explained through a series of tweets that the biggest risk to the U.S. economy does not lie in rate hikes by the Federal Reserve, but the inflation that is hurting consumer and business confidence.

Ackman asserted this argument with the example that “for the first time, a proposed renewal of an audit contract for one of our companies was presented with an inflation factor to justify the increase in the annual fee.”

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The Terminal Rate Argument: The terminal rate can be defined as the expected peak of the rate hike cycle. Presently, the market is anticipating this rate at 3.4% by end of 2022, after which it's expected to fall. Ackman tweeted that Fed Chair Jerome Powell is likely to be asked about a possible rate reversal stance next year.

“Market pricing implies that the terminal Fed Funds rate will peak at 3.4% by the end of this year, immediately declining thereafter to 2.7% by next year. What factors would cause the @federalreserve to immediately lower rates after just raising them?” he tweeted.

Tomorrow, Powell is likely to be asked: “Market pricing implies that the terminal FF rate will peak at 3.4% in 12/22 immediately declining thereafter to 2.7% by YE ‘23. What factors would cause the @federalreserve to immediately lower rates after just raising them?” Interestingly

Why It Matters: The billionaire hedge fund manager argued the more the market believes that the Fed will immediately reverse course, the less effective raising rates will be in moderating inflation, and the more the Fed will have to raise rates. 

What Could Be Done: Ackman said he expects Powell to show hawkish resolve on not only maintaining higher rates for longer but also being open to a terminal rate meaningfully, at higher than 3.4%.

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Collage created using photo by Center For Jewish History, NYC on Wikimedia and engin akyurt on Unsplash