Consumer price inflation data set a new 40-year high in June, according to the U.S. Labor Department.
Market Prices In Aggressive Hikes: Following the June inflation data, short-term fed funds futures rose, suggesting a peak fed funds rate of 3.68% by the end of 2022, said Bill Ackman, founder of hedge fund Pershing Square. The Federal Reserve will likely begin cutting the rate thereafter, taking it down to 2.9% by January 2024, he added.
Fed dot plots released after the June monetary policy meeting suggest the Fed fund rate rising to slightly higher levels and remaining flat in 2023, followed by a gradual reduction beginning in 2023, Ackman noted.
Today's Economy Reminiscent Of the 1970s and 1980s: Ackman is of the view that today's economic backdrop is much more comparable to the scenario in the 1970s and 1980s than the previous three recessions. He noted that former Fed chair Arthur Burns erred by lowering rates amid the slowdown in real GDP during a period of high inflation.
The massive inflation build-up stayed for long until Paul Volcker took over and raised the fed fund rate to 20%, the hedge fund manager said.
"Burns' policy error is well understood by Powell and the Fed governors and likely explains their dot plot curves," Ackman said.
Volcker maintained the fed fund rate substantially above the consumer price inflation for years to moderate inflation, the analyst said.
Related Link: Bill Ackman Steps Up Call For Rapid Fed Rate Hikes To Quell Inflation
Fed Funds Outlook: Ackman posed a question on whether the 3.7% fed fund rate is adequate to subdue the 9.1% consumer price inflation.
"Time will tell whether peak FF will need to go to 4%+ for an extended period," Ackman said.
He expects supply to remain constrained and high inflation to persist, citing how the Fed has two blunt tools: the fed fund rate and managing expectations.
With year-end fed fund rate projections beginning to approach where it needs to be, market expectations for the rate need to be managed upward, beginning at year-end and the next 24 months, he explained.
"I expect the market will adjust FF expectations upward as the Fed provides more clarity and emphasis on the need for higher rates for longer, and when market participants carefully review the ‘70s and early ‘80s precedents and their comparability to current economic conditions," Ackman said.
Photo via Insider Monkey on Flickr
