Billionaire hedge fund manager Bill Ackman said the Federal Reserve must deliver old-fashioned "shock and awe" to financial markets by making a much larger one-off hike in benchmark interest rates to combat inflation.
“The @Federalreserve could work to restore its credibility with an initial surprise move of 50 basis points to shock and impress the market which would demonstrate its resolve to inflate. The Fed is losing the inflation battle,” Ackman wrote in a series of tweets on Saturday.
Ackman said the US Federal Reserve has lost credibility on Wall Street, which could affect its ability to influence inflation expectations, which some see as a significant drag on sentiment.
"The unsolved elephant in the room is the Fed's loss of perceived credibility as an inflation fighter and whether 3 to 4 would therefore suffice," he wrote.
Markets are broadly expecting the US Federal Reserve to deliver a 25 basis point hike at its March meeting. According to data provided by CME Group Inc.
the odds suggest a 79% chance of such an increase, with only a 3% chance of a 50 basis point hike on federal funds rates, which currently range between 0% and 0.25%.
The Fed has presented a plan to raise interest rates to 2.1% by the end of 2023. Former New York Fed President William Dudley and others believe the central bank will likely need to raise interest rates closer to 4% to reverse loose monetary policy largely maintained due to the COVID-19 pandemic.
Fed Chair Jerome Powell told the Senate Banking Committee in early January that a surge in inflation, which has risen to a high not seen in about 40 years, was due to supply-demand imbalances. While the Fed can cool demand, it will get some help when supply constraints ease, he said.
Read: Forget rate hikes. How the Fed manages its $9 trillion in assets is what really matters, and the Fed is considering proposals for an eventual reduction in bond holdings
However, some market economists and strategists have argued that Fed policymakers made a mistake by not addressing inflation sooner and calling it temporary, with Deutsche Bank researchers calling the Federal Reserve "way behind" from the start of the curve” last year with tighter policies now forcing them to act quicker and sooner than expected.
Read: For example, the Federal Reserve could shrink its $8.77 trillion balance sheet to combat high inflation, according to a former Fed official
Economists expect four hikes in 2022, as does Goldman Sachs Group Inc.
JPMorgan Chase & Co.
CEO Jamie Dimon has speculated that the Fed may need to raise rates as much as seven times, which would be a much faster pace of rate hikes than market participants are pricing in.
Ackman said the Fed can do a lot to restore any road balance it may have lost by surprising the market with a much larger-than-expected rate hike, which could avoid the need for a long string of hikes or more aggressive action.
See: Get ready for the climb. Here's what history says about stock market returns during Fed rate hike cycles.
“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.
Markets were unsettled by the prospect of tightening financial conditions, with major equity indices weighed in part by the prospect of higher interest rates on Friday, while 2-year Treasury yields fell
Reflecting the Fed's short-term policy stance, it climbed 0.965% to a nearly two-year high, while the TMUBMUSD10Y 10-year Treasury note rate, up 1.792%, rose 6.3 basis points to 1.771% to end the week .
All three major stock benchmarks closed lower last week and are down sharply so far in early 2022 with the Dow Jones Industrial Average
The S&P 500 Index lost 1.2%
away from 2.2% and the Nasdaq Composite Index
Down 4.8% so far in January.
Ackman runs Pershing Square Capital Management and is a prominent and outspoken investor whose net worth is approximately $3.3 billion, according to Forbes.