Bill Ackman: The Fed’s inflation target can only be reached with great pain

• US inflation remains stubbornly high
• Bill Ackman warns of a severe recession if the inflation target is maintained
• Ackman recommends raising the inflation target

The Ukraine war and global supply chain issues pushed US inflation to its highest level in over 40 years in June 2022. The Fed, realizing that it was wrong in its assessment that rising inflationary pressures were merely a temporary phenomenon, responded with an unprecedented series of large rate hikes. Most recently, in mid-December, the US monetary authorities raised the key interest rate by a further 50 basis points to between 4.25 and 4.50 percent. The Fed has also signaled that the 2023 rate peak of around 5.1% is likely to be higher than projected at around 4.60% in September, and has firmly dismissed the notion that it could cut rates again as early as next year . However, this is hawkish monetary policy also a balancing act for the central bank, because higher interest rates help to dampen inflation, but can also slow down economic growth. As a result, fears of a recession are now increasing again among many market participants.

Bill Ackman fears recession

Bill Ackman is among those who fear a long, protracted crisis. The Pershing Square CEO rose to prominence during the Corona crash for shorting the market and making billions in cash for his investors and himself. In recent months he has been a vocal critic of the US Federal Reserve. As early as February 2022 – and thus before the first key interest rate hike – he had called for the Fed to take major interest rate hikes, since it could only regain its credibility and possibly win the fight against inflation through a market shock. But although the US monetary authorities have aggressively tightened their monetary policy several times, inflation in the US is still far from the inflation target of 2.0 percent.

In a tweet in mid-December, Bill Ackman stated that he believes it will take a long, hard and job-wrecking recession for inflation to return to the Fed’s target level. The statistics speak for the hedge fund manager. According to “Börse Online”, it takes up to five years for inflation of this magnitude to return to the level desired by the central bank.

Change in inflation target

Even if the inflation rate falls to the level at which the Fed sees price stability over the long term, Ackman does not expect it to remain stable there in the long term. The stock exchange expert therefore advocates accepting an inflation rate of around 3.0 percent. In his opinion, this would be the better strategy to achieve a strong economy and job growth in the long term.

After the last interest rate decision, however, Fed Chair Jerome Powell asserted that the central bank would remain hawkish until the inflation target was reached. “We are not considering changing our inflation target and we will not be considering it,” Powell said at the subsequent press conference. “Now is not the time to worry about it.”

However, Bill Ackman does not believe that the current inflation target is credible. Because de-globalisation, the transition to alternative energies, wage increases and shorter supply chains all have an inflationary effect. “The Fed cannot change its target at the moment, but it will do so in the future,” said the star investor with conviction.

Editorial office finanzen.net

Image sources: Bryan Bedder/Getty Images for The New York Times, Sascha Burkard / Shutterstock.com



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