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Why hedge funds want the US central bank to bring on the pain

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In a subsequent tweet, Ackman noted that 100 basis point rate rises “would be better”. He added that the sooner the Fed reaches its peak rate – or terminal rate – “and thereafter can begin to ease, the sooner the markets can recover”.

Markets now anticipate that the Fed will lift official interest rates to a peak of about 4 per cent by mid-2023.

‘Why not get there faster?’

But hedge fund billionaires aren’t the only ones questioning whether the Fed should aim to get to its final destination sooner. Other economists argue that the Fed should act with alacrity to dampen rising prices, and to stop inflationary expectations from becoming entrenched.

As former New York Federal Reserve chief William Dudley commented this week, “if you decide that the speed of getting there is just as important as the level that you’re going to get to, then why not get there faster?”

Because it’s not as though the Fed is avoiding a major share market meltdown by treading cautiously.

The US share market has plunged deep into bear territory. The blue-chip benchmark, the S&P 500, is now down 22 per cent from its January peak.

The tech-heavy Nasdaq is down more than 30 per cent from its peak last November.

This extraordinary market slump has wiped trillions of dollars off US household wealth. The Fed’s ultra-easy monetary policy – which combined near-zero interest rates with massive bond purchases – helped boost the US sharemarket’s total value to a record 200 per cent of US gross domestic product at the end of last year.

But the vicious share market sell-off has wiped more than $US9 trillion off the value of share portfolios held by US households.

At the same time, investors have dumped other assets – such as bonds and cryptocurrencies – amid growing fears that the Fed will be forced to lift interest rates aggressively to bring surging prices under control.

Since the start of the year, the plummeting prices of shares, bonds and crypto has wiped $US13 trillion from the wealth of US households.

The Fed estimates that US households tend to reduce spending by US4¢ for every one dollar decline in their wealth. That suggests that the vicious, across-the-board declines in asset values will reduce US consumer spending – which is the key driver of US economic activity – by about 2 per cent.

That’s a major brake on consumer spending at a time when US consumers are already grappling with surging prices for necessities, such as energy, groceries, petrol and housing.

And that’s before US consumers have to contend with the inevitable decline in house prices, as mortgage rates climb to the highest level in more than a decade.

Some analysts argue that the biggest risk to the US economy is an overly cautious Fed. They warn there is a risk that the more investors worry that the Fed is behind the inflation curve, the more they’ll dump shares, bonds and other assets.

But the more these assets fall, the more US consumers will cut back their spending. However, this will then eat into corporate earnings and trigger a further downward move in the sharemarket.

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