Bill Ackman warns US economy headed for ‘train wreck’ after latest Fed rate hike
The US economy could be headed for a “train wreck” after the Federal Reserve continued its fight against inflation and Treasury Secretary Janet Yellen ruled out “blanket” protection for bank deposits despite the worst financial crisis in a decade, according to hedge fund manager Bill Ackmann .
Ackman, the founder of Pershing Square Capital Management, sounded the alarm on Wednesday about a possible acceleration in bank deposit outflows after Yellen indicated that not all uninsured deposits will be protected in future bank failures.
“That’s a big mistake. We suffer from self-inflicted wounds,” he wrote in a tweet. Yellen’s statement, combined with the Fed’s recent rate hike, “puts even more pressure” on non-essential banks.
The Fed is raising interest rates by a quarter point despite the latest banking turmoil
His comments came shortly after Fed officials announced another quarter-point rate hike, raising interest rates to a range of 4.75% to 5%, the highest since 2007. This was the ninth straight rate hike to combat the high inflation.
That decision was complicated by the stunning implosion of Silicon Valley Bank and two other banks in early March, as the rapid rise in interest rates played a direct role in the bank’s failure. Rising interest rates threaten to exacerbate instability in the financial system.
Regulators rushed to contain the fallout from the bank failures, including protecting all deposits at the two institutions — even those holding funds in excess of the FDIC.
The moves were intended to stem a flow of cash from small and regional US lenders as customers rushed to banks deemed too big to fail. However, smaller banks are still feeling the sting of the industry-wide turmoil.
“Combined with the higher cost of debt and deposits due to rising interest rates, you should consider the impact this will have on lending rates and our economy,” Ackman said. “The longer this banking crisis is allowed to continue, the greater the damage will be to smaller banks and their ability to access cheap capital.”
He added: “Trust is built over many years but can be destroyed in a matter of days. I’m afraid we’re headed for another train wreck. Hopefully our regulators will get this right,” he added.
Fed policymakers said it is too early to say how the banking sector tensions will affect the broader economy.
“Financial conditions appear to have tightened, probably by more than traditional indices suggest,” Chair Jerome Powell told reporters during a news conference after the meeting. “However, the question for us is how significant this will be – how big will it be and how long will it last?
“We’ll see how serious this is and if it looks like it’s going to last. And if that is the case, it could easily have a significant macroeconomic impact and we would factor that into our policy decisions.”