As you’re undoubtedly aware, stock and bond markets have tumbled recently, as inflation has exploded and the Federal Reserve has continued its campaign to raise interest rates.
The S&P 500 has slid 21% year to date and the 10-year Treasury yield has more than doubled to 3.38%.
On the inflation front, consumer prices jumped 8.6% in the 12 months through May. Many experts have criticized the Fed for its slow response to inflation, which began percolating last year.
And hedge-fund icon Bill Ackman, chief executive of Pershing Square Capital Management, is one of them.
“The Federal Reserve has allowed inflation to get out of control, he tweeted. “Equity and credit markets have therefore lost confidence in the Fed.”
The central bank raised rates by a combined 0.75 percentage point, or 75 basis points, in March and May.
But Ackman hasn’t lost hope. “Market confidence can be restored if the Fed takes aggressive action with 75 bps tomorrow [June 15] and in July,” he said.
Commitment to Aggressive Rate Moves
The Fed also must show “a commitment to continued aggressive federal funds-rate increases and quantitative tightening until it is clear that inflation has been tamed,” Ackman said. The federal-funds rate applies to overnight interbank loans.
Quantitative tightening means reducing the Fed’s $9 trillion balance sheet by selling Treasury and mortgage bonds.
The Fed has started selling up to $47.5 billion of those securities per month, and the cap will increase to $95 billion in September.
As for how much the Fed should increase rates, “Volcker needed 20% fed funds for similar levels of inflation measured comparably,” Ackman said.
He was referring to former Fed Chairman Paul Volcker, who began raising rates in 1979 and kept monetary policy tight until 1982.
Federal Funds Terminal Rate: 5%-6%?
Turning to the present, “assuming a 4% terminal rate [for federal funds] gets it done is hopium,” he said, combining the words “hope” and “opium.”
“Hopefully, 5% to 6% gets it done if the Fed gets there quickly,” Ackman said.
The Fed’s federal funds rate target stood in the range of 0.75% to 1% ahead of the central bank’s meeting June 15.
In terms of what the Fed will do June 15, “yes, 100 basis points tomorrow, in July and thereafter would be better,” Ackman said.
“The sooner the Federal Reserve can get to a terminal fed funds rate and thereafter can begin to ease, the sooner the markets can recover.”
The consensus among experts seems to be that the Fed will lift rates 0.75 percentage point on June 15.
Interest-rate futures traders see a 96% probability of that outcome, with a 4% chance for a full percentage point, or 100 basis points.
