Topline
The Federal Reserve isn’t doing its job fighting runaway inflation—and unless the central bank tightens monetary policy and raises interest rates “more aggressively,” the ongoing stock market sell-off could well turn into a full “economic collapse,” warned hedge-fund billionaire Bill Ackman on Tuesday.
Key Facts
The Federal Reserve has lost credibility as it has failed to stop raging inflation, said billionaire investor Bill Ackman, founder and CEO of hedge fund Pershing Square Capital Management, in a series of tweets on Tuesday.
“Markets are imploding because investors are not confident that the Federal Reserve will stop inflation,” and with consumer prices surging 8.3% on a yearly basis in April, inflation is way “out of control,” Ackman said.
The only way he sees inflation moderating is with more decisive action from the Federal Reserve, and if that doesn’t happen, the result will be a stock market crash that sends the economy into a recession.
Not only has the Fed already “lost credibility for its misread and late pivot on inflation,” but several current and former Fed officials have “waffled and made dovish remarks proposing a modest increase in rates and a pause in the fall,” Ackman points out.
The central bank’s current monetary policy and forward guidance are setting investors up for “double-digit sustained inflation that can only be forestalled by a market collapse or a massive increase in rates” and that is why there are “no buyers for stocks” in today’s markets, he says.
The current “downward market spiral” will only end when the Fed draws a “line in the sand on inflation and says it will do ‘whatever it takes,’” Ackman insists, adding that the central bank will have to continue raising rates “until the inflation genie is back in the bottle.”
Crucial Quote:
“If the Fed doesn’t do its job, the market will do the Fed’s job, and that is what is happening now,” Ackman says. “There is no prospect for a material reduction in inflation unless the Fed aggressively raises rates, or the stock market crashes, catalyzing an economic collapse and demand destruction.”
Big Number: $2.8 Billion
That’s how much Ackman is worth, according to Forbes’ calculations, down from $3 billion earlier this year.
What To Watch For:
“Markets will soar once investors can be confident that the days of runaway inflation are over,” Ackman predicts. “Let’s hope the Fed gets it right.” The Federal Reserve raised interest rates by half a percentage point earlier this month, its most aggressive increase yet in the battle to tame inflation—with traders expecting a similar, if not larger, rate hike at the central bank’s upcoming meeting in June.
Key Background:
The stock market is having one of its worst years on record amid rising recession fears, with investor sentiment taking a massive hit on concerns over inflationary pressures and rising rates. The Dow Jones Industrial Average has fallen for eight weeks in a row—its longest losing streak since 1932, while the S&P 500 and tech-heavy Nasdaq Composite have moved lower for seven straight weeks, their longest losing streaks since the dot-com crash in 2001.
Further Reading:
Stock Market Selloff Resumes As Snap’s 40% Plunge Drags Tech Shares Lower (Forbes)
Here’s How Long It Takes For Stocks To Recover From Bear Markets (Forbes)
S&P 500 Briefly Plunges Into Bear Market As Stocks Fall For Seventh Week In A Row (Forbes)
Here’s The Worst Case Scenario For Stocks, According To Goldman, Deutsche Bank And Bank Of America (Forbes)