Since late last year, billionaire hedge fund manager Bill Ackman has been chiding the Federal Reserve to act seriously to take on inflation.
Now he is sounding the alarm over whether the Fed will ever reach its target inflation rate, and warning if it cannot, and it is forced to maintain rates at near-peak, that will act as a significant downward pressure on equities.
In a quarterly call with investors, the Pershing Square Capital Founder and CEO noted that present rate levels are “meaningfully below where they are going to go.” He went on, “We think that is, of course, a risk for equities. And part of our thesis is we think inflation is going to be structurally higher.”
He added, “We do not believe that it is likely the Federal Reserve is going to be able to get inflation back to a consistent 2% level.”
As of November 15th, Pershing Square Holdings is down about 9% on the year, as the S&P 5000 has lost 18%. However the fund lost 25% in the second quarter alone, making it the worst quarter since 2016. Lowe’s (LOW), Chipotle (CMG), and Restaurant Brands (QSR) are the fund’s top holdings according to Pershing’s latest 13F filing. Lowes and Chipotle have fallen about 18% and 12% respectively for the year, while Restaurant Brands has gained nearly 11%.
Ackman, who called for the Fed to perform a full interest rate point hike in July, says geopolitical issues will keep inflation persistent for the time being, even as Fed officials make the most hawkish policy moves seen in decades.
He added, “Supply chain risks that people have become extremely experienced with in the last year or so have made nearly every U.S. CEO rethink outsourced or distant supply chains. A lot more of that is going to come closer to home, and it is more expensive to do business here.”
The Federal Reserve has raised its key benchmark rate six times this year, including four consecutive 75 basis point interest rate hikes between June and November. That raised the Fed funds rate to the highest level seen since 2008, at 3.75%-4%. Further increases are expected into 2023.
Although inflation dropped slightly in October, at 7.7% it was still well beyond the Federal Reserve’s 2% target rate, despite the hawkish policy position the central bank has staked out.
Ackman is not alone in his beliefs. Earlier in the year, Blackrock Investment argued that inflation has been driven by a shift in consumer spending from services to goods, as well as production constraints produced by geopolitical issues, from the pandemic to the war in Ukraine, to China’s Covid lockdowns.
A team led by Jean Boivin, head of BlackRock Investment Institute said in September, “Central banks can’t fix these constraints, in our view, hence a brutal trade-off: trigger a deep recession by hiking rates or live with more persistent inflation. The Fed’s forecasts don’t acknowledge this trade-off.”
