Elon Musk Responds To Bill Ackman's Plea To Powell For A Pause Amid Banking Crisis: 'Fed Needs To Drop Rates By At Least…'

The Federal Open Market Committee, the monetary policy-setting arm of the central bank, is scheduled to kickstart a two-day meeting on Tuesday. Ahead of the meeting, Pershing Square’s Bill Ackman chimed in on what the Fed should be doing in the wake of the recent adverse developments.

Systemic Shocks And Liquidity Crunch: The Fed should pause on Wednesday, given a number of shocks to the system, Ackman tweeted, tagging the central bank. Three U.S. banks have closed in a week, wiping out equity and bondholders, he said, referring to the collapses of the Silvergate Bank, Silicon Valley Bank and Signature Bank.

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Also, Credit Suisse ceased to exist and its junior bondholders were left in a lurch without access to their money, the hedge fund manager said.

“Notably, bondholders bearing losses is a new phenomenon as they were protected in the GFC,” he said. The Great Financial Crisis of 2007-08 occurred due to the collapse of the U.S. housing market that set in motion a subprime mortgage crisis and led to the bankruptcy of Lehman Brothers and Bear Stearns.

Ackman also pointed to the steep drop in the shares of First Republic Bank FRC on Monday amid contagion fears. “The banking crisis remains unresolved and higher rates won’t help,” he said.

“We don’t yet know where the losses are for investors in these institutions and what the contagion effects may be.”

Ackman sees a meaningful tightening of financial conditions.

Powell’s Task Cut Out: As inflation continues to be a problem, Fed Chairman Jerome Powell can show resolve by pausing in March and making it very clear that this is a temporary pause, Ackman said. The Fed chair can clarify that his intent is to raise rates at the next meeting unless the banking crisis remains unresolved and has sufficiently slowed the economy, he added.

The best course of action to tackle the banking crisis now is to have a temporary Federal Deposit Insurance Corporation's deposit guarantee until an updated insurance regime is introduced, the fund manager said. If bank number five is closed, market attention will move to banks six, seven and eight, he added.

“This is not an environment into which the @federalreserve should be raising rates and adding additional pressure on the system as financial stability is the Fed's first responsibility,” Ackman said.

Elon Wants To Go Radical: Tesla CEO Elon Musk reacted to Ackman’s tweet and chimed in with his views as well. The billionaire went a step ahead and suggested the central bank should not only pause but also implement an aggressive rate cut.

“Fed needs to drop the rate by at least 50bps on Wednesday,” he said.

Fed needs to drop the rate by at least 50bps on Wednesday

— Elon Musk (@elonmusk) March 21, 2023

Separately, Musk replied to "Unusual Whales" tweet about the U.S. officials studying ways to let the FDIC temporarily insure deposits beyond the current $250,000 caps on most accounts, without having to get Congressional approval. He said it was absolutely required to stop bank runs.

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