Billionaire investor Bill Ackman wants the U.S. Federal Reserve to raise interest rates. Ackman, the head of Pershing Square Capital, said that doing so would help to restore the Fed’s credibility.
Bill Ackman is not the only one to have a problem with the Fed’s low rates. It started when George W. Bush took office and there was a recession. The Fed lowered rates to help. But the low rates also helped to feed into the overheated housing market which in turn led to the 2008 sub-prime mortgage debacle that caused the Great Recession.
And for a long time after that rates needed to be kept low because of the recession as the economy desperately needed the cheap money to keep going. A rate hike could have been deadly not just for America, but for economies around the world.
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But why would Bill Ackman want higher rates? After all, low rates mean that it’s cheaper to borrow money so that businesses can grow and expand. This in turn means that their stocks will go up and activist investors like Bill Ackman surely want that to happen.
While it has become conventional wisdom that the @federalreserve will raise rates 3 to 4 times this year to mitigate inflation, the market expects 25 bp increments. The unresolved elephant in the room is the loss of the Fed’s perceived credibility as an inflation fighter and
— Bill Ackman (@BillAckman) January 15, 2022
And a rate hike would make bonds more attractive to investors who would sell stocks to have the money to buy bonds which are a safer investment. This is why the bond markets and stock markets are negatively correlated – if one goes up then the other goes down.
So what exactly is Bill Ackman afraid of? Well, inflation for one thing. Low interest means more cash out there which in turn causes inflation. At the height of the Great Recesiion inflation was actually necessary to avoid deflation, like what happened during the Great depression. Deflation means plummeting pries, leading to losses, which leads to companies firing people or failing, which leads to a worse recession. Inflationary practices by the government, it is believed, offset this.
But this cannot be sustained permanently.
Bill Ackman tweeted, “While it has become conventional wisdom that the @federalreserve will raise rates 3 to 4 times this year to mitigate inflation, the market expects 25 bp (Basis Point) increments. The unresolved elephant in the room is the loss of the Fed’s perceived credibility as an inflation fighter and whether 3 to 4 [raises] would therefore be enough.”
He went on to say that the Federal Reserve could work to restore its credibility with an initial 50 basis points (a basis point is 1/100 of one percent or 0.0001) surprise move to “shock and awe the market.”
Bill Ackman said that this would demonstrate its resolve on inflation. “The Fed is losing the inflation battle,” he said, “and is behind where it needs to be, with painful economic consequences for the most vulnerable. A 50 BP initial move would have the reflexive effect of reducing inflation expectations, which would moderate the need for more aggressive and economically painful steps in the future. Just a thought.”
Other problems stemming from low rates include a low Dollar. While this may make American exports more attractive, it also makes imports more expensive and reduces foreign investment in the U.S.