Billionaire investor Bill Ackman says the Federal Reserve is losing its battle against inflation and should raise its key interest rate by a bigger-than-expected 50 basis points in March to “restore its credibility.”
“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,” Ackman said in a series of tweets.
Facing pressure from Congress and the public to tackle the hottest inflation since the 1980s, a chorus of officials this month floated raising rates in March and the potential need to hike four and even five times this year, marking a clear shift in outlook from just a few weeks ago.
In December, U.S. central bankers forecast that they will raise rates three times this year and speed up the pace of tapering their asset-purchases to conclude the program in mid-March. The Fed hasn’t raised rates by more than 25 basis points at a time since May 2000.
“The unresolved elephant in the room is the loss of the Fed’s perceived credibility as an inflation fighter,” Ackman said, adding that an initial half-point rate hike would “shock and awe the market, which would demonstrate its resolve on inflation.”
Henry Kaufman, the chief economist at Salomon Brothers nicknamed “Dr. Doom,” said in an interview that if he were advising Jerome Powell, he’d urge the Fed chair to be “draconian,” starting with an immediate 50-basis point increase in short-term rates and explicitly signaling more to come.
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told analysts on Friday that the Fed could lift its benchmark interest rate as many as seven times to fight rising inflation, although he didn’t specify how quickly that might happen.
The prospect of four hikes in 2022 is looking increasingly likely, with a growing group of banks switching their official forecasts to reflect that. And while markets haven’t yet moved to fully price in a full percentage point of increases for this year, it has been getting closer and traders have been very active in guarding themselves against the risks of a quicker-than-anticipated cycle. With hawkish Fed rhetoric and a hot CPI reading taking center stage this week, demand for eurodollar option structures that protect against Fed hikes has been palpable, with some even contemplating the prospect of a half-point hike in March.
Powell pledged earlier in the week to do what’s necessary to contain an inflation surge and prolong the expansion. “If we have to raise interest rates more over time, we will,” Powell told the Senate Banking Committee Tuesday under questioning at his confirmation hearing for a second term as central bank chief. “We will use our tools to get inflation back.”
U.S. consumer prices soared last year by the most in nearly four decades, sapping the purchasing power of American families and setting the stage for the rate increases.
The consumer price index climbed 7% in 2021, the largest 12-month gain since June 1982, according to Labor Department data released Wednesday. The widely followed inflation gauge rose 0.5% from November, exceeding forecasts.