Stocks barely budged today despite a strong open on a hint from the Fed that the current hiking cycle might be over. The Dow Jones Industrial Average and the S&P 500 were almost unchanged, while the Nasdaq Composite saw a slight dip of about 0.1%.
The shift in sentiment was sparked by Fed governor Christopher Waller’s statement that there’s “no reason” to keep rates “really high” if inflation shows a consistent downward trend. While Fed governor Michelle Bowman had a different take, Waller’s dovish stance was echoed by others, including Chicago Fed president Austan Goolsbee, who expressed concerns about maintaining excessively high rates.
This dovish turn has caught the attention of influential investor Bill Ackman, founder of Pershing Square Capital Management. Ackman anticipates the Fed might start slashing rates sooner than many expect, possibly as early as the first quarter. This is a more aggressive timeline than what traders, who had been expecting a rate cut in June based on swaps market data, had anticipated.
Ackman, in a forthcoming episode of The David Rubenstein Show: Peer-to-Peer Conversations, shared, “We’re betting that the Federal Reserve is going to have to cut rates more quickly than people expect. That’s the current macro bet that we have on.” This statement comes in the context of the Fed’s aggressive rate hikes since March 2022, marking the quickest pace of increases in four decades, and yet, no cuts have been made despite a general slowdown in US inflation this year.
Ackman pointed out the increasing real rate of interest as inflation declines, a factor significantly impacting the economy. He noted that if the Fed maintains rates around 5.5% while inflation trends below 3%, it would result in a notably high real interest rate.
Pershing Square, managing about $17 billion in assets, has been known for its shareholder activism, though Ackman prefers to describe his approach as that of “engaged owners” rather than aggressive activists. The firm has a history of making significant macro bets. For instance, Ackman’s short position on 30-year US Treasuries earlier this year proved to be a wise move as rates climbed almost a full percentage point in the following months. However, not all of Pershing Square’s bets have been as successful; for example, their position against Hong Kong’s pegged dollar hasn’t yet yielded the expected results.
In his conversation with Rubenstein, Ackman expressed skepticism about the US economy achieving a soft landing, a scenario where the Fed’s rate hikes don’t trigger a recession. He warned of the risk of a hard landing if the Fed doesn’t commence rate cuts soon, citing signs of an economy losing momentum.
In the bond market, the Fed’s dovish comments fueled further gains, with the 10-year Treasury yield dropping about 6 basis points to around 4.28%, marking its lowest point since September. If the Fed takes Ackman’s advice, yields could plummet further amid a continued bond resurgence.
But before the Fed makes any decisions, investors will first have to contend with the next batch of inflation data, due out tomorrow via the PCE release. Core PCE has been a preferred inflation gauge for the Fed in the past, and if the market sees a cool reading, the November rally could continue into December, even though stocks are looking very overbought.