• Bill Ackman calls for major rate hike as “market shock”
• Central bankers must restore confidence
Price pressure is increasing: In order to get a grip on the consequences of currency devaluation, the Federal Reserve will tighten its monetary policy and leave behind the policy of cheap money, which was intended to mitigate the consequences of the Corona crisis. In the meantime, the market is no longer discussing whether the Fed will raise interest rates, but rather how many rate hikes can be expected. While two interest rate adjustments were still being targeted in November, by the end of the year there was already talk of three possible rate hikes. Meanwhile, St. Louis Regional Federal Reserve Chairman James Bullard even advocated four rate hikes in 2022, telling the Wall Street Journal. If he has his way, the first rate hike will take place in March.
Ackmann calls for shock for the markets
Billionaire hedge fund manager Bill Ackman is also hoping that monetary authorities will start making interest rate adjustments as early as March, but he doesn’t think the Fed should take small steps. The Federal Reserve could work on regaining its credibility if, as a first step, it were to surprisingly raise interest rates by 50 basis points, the expert said in a recent Twitter post. This will shock and impress the market, Ackman believes, adding that it is a way for policymakers to demonstrate their resolve on the inflation issue. The Fed is currently losing the inflation battle and is lagging behind.
whether 3 to 4 would therefore be enough. the @federalreserve could work to restore its credibility with an initial 50 bps surprise move to shock and awe the market, which would demonstrate its resolve on inflation. The Fed is losing the inflation battle and is behind where it is
– Bill Ackman (@BillAckman) January 15, 2022
In his view, monetary authorities have lost credibility in the market, which in turn could affect their ability to influence inflation expectations. This, in turn, could weigh on market sentiment, Ackman continued: “The elephant in the room is the Fed’s loss of perceived credibility as an inflation-fighter and whether 3 to 4 [Zinserhöhungen] would therefore suffice”.
Fewer interest rate steps needed?
If the Fed followed Bill Ackman’s proposal, the monetary authorities could defuse two fronts at the same time. A drastic rate hike could restore the markets’ confidence in the US Federal Reserve’s ability to act. Furthermore, fewer rate moves would be needed overall in this scenario, Ackman believes: “An initial move of 50 basis points would have the reflexive effect of lowering inflation expectations, which would mitigate the need for more aggressive and economically painful moves going forward. Just a thought,” the hedge fund manager tweeted.
Central bankers reassuring for a long time
Observers have been accusing the monetary authorities around the world of inactivity for some time. The European Central Bank (ECB) had long spoken of a “temporary effect” despite the significant increase in inflation. “Our inflation is more stubborn and – let’s say – not as temporary as we expected,” said ECB Vice President Luis de Guindos in December. For 2022, however, ECB boss Lagarde already expects an easing on the inflation front. “We expect that the drivers of inflation will abate over the course of this year,” said the ECB Chair soothingly.
Meanwhile, the US inflation rate rose to 7.0 percent – the highest rate since June 1982. In the euro zone, consumer prices rose by an average of 5.0 percent in December, according to data from the EU statistics agency Eurostat – that was the highest increase since Eurostat records began in 1997.
While the Fed is firmly planning interest rate hikes for 2022 and interest rate adjustments have already been made in countries such as the Czech Republic, Russia and Great Britain, the ECB is still approaching the issue with caution. According to the head of the Dutch central bank, Klaas Knot, the key interest rates in the euro zone could rise at the beginning of 2023.
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