Today, 12 members of the Federal Reserve are meeting for the Federal Open Market Committee (FOMC). At the meeting, the 12 members decided how much to raise the federal funds rate. Yesterday, billionaire and hedge fund manager Bill Ackman gave his take on what should happen at the meeting. He stated the Fed “has allowed inflation to get out of control. Equity and credit markets have therefore lost confidence in the Fed.”
The Pershing Square CEO voiced his support for an interest rate hike of at least 75 basis points (bps), which would restore “market confidence.” A basis point is a percent of a percent, so 100 bps is equivalent to 1%. He believes a 100 bps increase would have been better this month, followed by a 75 to 100 bps increase during the July FOMC meeting.
Ackman added that a commitment to continue aggressive rate hikes and quantitative tightening (QT) until inflation cools down would be best for the markets. He points out former Fed Chairman Paul Volcker needed 20% interest rates for “similar levels of inflation measured comparably.”
Billionaire Bill Ackman Calls for 100 bps Interest Rate Hike
Ackman believes the assumption of a 4% terminal rate cooling down inflation is “hopium,” and a rate between 5% and 6% is more suitable “if the Fed gets there quickly.”
Meanwhile, Ackman accurately predicted the Fed would raise rates by 75 bps today. He wants the agency to make it clear that “nothing is off the table” for July, including a hike of 100 bps or more.
So, how exactly does the federal funds rate affect the stock market? Higher interest rates have the effect of reducing the value of future cash flows. Therefore, companies who expect to generate the majority of their cash flows in the future will be more affected by interest rate hikes.
On the other hand, companies who currently generate high levels of cash flow at the present moment will be less affected by higher rates. Higher interest rates also makes it more expensive for companies to borrow capital or incur debt. If less debt is incurred, then growth for companies can slow.
Meanwhile, Ackman last disclosed in January that he owns interest rate hedges. At the time, the fund manager reduced the notional size of his hedge by 80% to fund a Netflix (NASDAQ:NFLX) position, which he later sold as well. It’s not known if he has since increased the value of his hedge, but based on his tweets, it appears that he has.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.