Bill Ackman Steps Up Call For Rapid Fed Rate Hikes To Quell Inflation

Billionaire investor Bill Ackman has offered his take on the dramatic decline in U.S. bond yields seen in the past two weeks.

What Happened: The decline in 10-year Treasury note rates to as low as 2.7910% on Friday is stunning and reflects recession fears, he said on Monday.

The yield on the 10-year Treasury Note, which hit an 11-year high of 3.4830% in mid-June, has eased in the past two weeks. And it has caught Ackman's attention.

"With inflation at 2%, if the nominal GDP declines from 4-5% to less than 2-3% for two quarters in a row, the economy will be deemed to be in a recession," he said on Twitter.

"Two quarters of negative GDP growth does not seem to be a reasonable definition during a period with high inflation, particularly when inflation has spiked to nearly 9%."

The billionaire argued that consumers are spending substantially more this year than the last, there are twice as many job openings than people looking for a job, the unemployment rate is at a 50-year low, wages are rising substantially and the labor market has tightened.

He expects second-quarter revenue and earnings growth to be strong for most companies, barring a few that have limited pricing power. Consumers are left with $2.5 trillion of excess savings and there is a mix shift away from goods to services, he added.

"Going by all these, it does not look like a setup for a true economic recession."

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Why Are Rates Falling?  Despite the Fed signaling aggressive tightening to rein in inflation, yields have dropped due to a misunderstanding of what a recession is, Ackman said. He thinks technical factors are driving volatility and the downward move.

The bet that rates would rise became one of the more crowded trades in history, going into the June Fed rate decision, Ackman noted. As speculators in the fixed-income market covered their short positions on the Fed news, rates began to decline, resulting in substantial mark-to-market losses, the fund manager said.

"With more data points emerging indicative of a slowing economy, the recession narrative took hold causing a further decline in rates, contributing to more losses, and short covering going into the quarter-end when exposures are required to be disclosed in investor reports and financial statements," Ackman said.

What Lies Ahead:  The Fed, Ackman noted, remains committed to bringing down inflation, even if it is at the expense of a spike in unemployment or a recession. He, however, doesn't think inflation will come down any time soon.

The Fed will need to rapidly raise rates to 4%-5% by the next year to snuff inflation.

"The sooner the Fed quells inflation, the better for longer-term bonds and long-term financial assets like equities," Ackman said.

Photo via Insider Monkey on Flickr