Bill Ackman says the Federal Reserve needs to raise interest rates to 4% or more as it tries to rein in soaring prices.
“A neutral rate of 2.25 to 2.5% makes no sense in a world with 9%, 6% or even 4% inflation,” he said.
Bond and equity markets rallied prematurely, according to the founder of Pershing Square Capital.
The Federal Reserve will have to raise interest rates to at least 4% if it wants to control inflation, according to billionaire investor Bill Ackman.
The chief executive of Pershing Square Capital said the US central bank last rate hike of 75 basis points will not be enough to control the surge in prices, despite the optimism of some investors.
“I don’t think there’s any prospect of going back to 2% without significantly higher rates, 4% or more, that are held at those levels for long periods of time,” Ackman said. tweeted Friday.
The Fed raised its target funds rate to between 2.25% and 2.5% earlier this week, but Chairman Jerome Powell said his policy decisions will be driven by data going forward, suggesting the Fed could slow the pace of its rate increases if economic indicators deteriorate.
Stock markets rallied after Powell’s comments, but Ackman said investor optimism seemed premature. He added that interest rates of 2.5% are unlikely to be high enough to control inflation, which hit a 41-year high of 8.6% in May.
“A neutral rate of 2.25-2.5% only makes sense in a world with stable inflation at 2%,” he said. “That makes no sense in a world with 9%, 6% or even 4% inflation.”
“Powell’s views on the neutral rate have only served to ease financial conditions materially, making the inflation problem worse and making his job more difficult,” he added.
Shares have rallied since Tuesday’s closing bell, with the S&P500 climbing 3.85% to return above 4,000 points for the first time in almost two months. A hike in base rates to 4% would likely significantly reduce investors’ newfound confidence in U.S. markets, Ackman warned.
“Bond and equity markets have rallied significantly since [Powell’s comments] because that implies that rates don’t need to rise much more,” he said. “The problem is that we are not close to a neutral rate.
Read the original article at Business Intern