The Fed May Never Achieve Its Inflation Goal, Bill Ackman Predicts

The billionaire investor expressed bearish opinions on Treasury bonds a day after Fitch downgraded U.S. debt.

Bill Ackman
Bill Ackman is betting against the 30-year T-bill. Adrian Edwards/GC Images

The Federal Reserve has been working diligently for over a year to tackle high inflation. With aggressive interest rate hikes, the Fed aims to bring inflation down to 2 percent from the 9.1 percent peak in June 2022. The plan seems to be working, finally, as consumer prices rose only 3 percent on a year-over-year basis in June. However, that may be as good as it gets, according to billionaire investor Bill Ackman, who wrote in a lengthy tweet yesterday (August 2) that he has “been surprised how low U.S. long-term [interest] rates have remained in light of structural changes that are likely to lead to higher levels of long-term inflation.”

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Those structural changes include “de-globalization, higher defense costs, the energy transition, growing entitlements, and the greater bargaining power of workers,” Ackman added. “As a result, I would be very surprised if we don’t find ourselves in a world with persistent ~3% inflation.”

Higher interest rates have led to higher returns on 30-year Treasury bonds, or T-bills, a key benchmark for fixed-income assets. The 30-year T-bill yield is up more than 20 percent since January to 4.17 percent as of yesterday. If inflation continues to fall, the Fed will most likely reverse its course and begin lowering interest rates to boost the economy. But based on Ackman’s forecast, T-bill yield could continue to rise to as high as 5.5 percent in the short term.

“If long-term inflation is 3% instead of 2% and history holds, then we could see the 30-year T yield = 3% + 0.5% (the real rate) + 2% (term premium) or 5.5%, and it can happen soon,” Ackman wrote in yesterday’s post. “There are many times in history where the bond market reprices the long end of the curve in a matter of weeks, and this seems like one of those times.” The “long end of the (yield) curve” is a financial term describing bonds with a term longer than 10 years.

When bond yield rises, its price falls. Ackman said his hedge fund, Pershing Square, has a short position on 30-year T-bills through purchasing options, betting T-bill prices will fall. He explained the position is “first as a hedge on the impact of higher [long-term] rates on stocks, and second because we believe it is a high probability standalone bet.”

Ackman’s bearish comments on U.S. Treasury bonds came a day after Fitch Ratings downgraded the creditworthiness of U.S. debt to AA+ from the top-notch AAA, sending U.S. stocks to tumble yesterday. Fitch cited alarm over the U.S.’s growing fiscal deficits and the federal government’s ability to handle debt crises.

“I have also been puzzled as to why the U.S. Treasury hasn’t been financing our government in the longer part of the curve in light of materially lower long-term [interest] rates. This does not look like prudent term management in my opinion,” Ackman wrote.

The Fed May Never Achieve Its Inflation Goal, Bill Ackman Predicts