Bill Ackman warns US economy headed for 'train wreck' after latest Fed rate hike

Hedge fund manager: 'We are suffering from self-inflicted wounds'

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Piper Sandler chief global economist Nancy Lazar discusses her outlook for the markets after White House press secretary Karine Jean-Pierre said the economy is ‘strong.’

The U.S. economy may be headed for a “train wreck” after the Federal Reserve continues 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 Ackman.

Ackman, who founded Pershing Square Capital Management, sounded the alarm on Wednesday about a possible acceleration of deposit outflows from banks after Yellen indicated that not all uninsured deposits will be protected in future bank failures.

“This is a big mistake. We are suffering from self-inflicted wounds,” he wrote in a tweet. Yellen's statement, combined with the Fed's latest interest rate hike, “puts even more pressure” on the non-systemically important banks.

FED RAISES INTEREST RATES A QUARTER POINT DESPITE RECENT BANKING TURMOIL

His comments came shortly after Fed officials delivered another quarter-percentage point rate hike, lifting the benchmark funds rate to a range of 4.75% to 5%, the highest since 2007. It marked the ninth consecutive rate increase aimed at combating high inflation.

Pedestrians near the Treasury building in Washington, D.C., on Dec. 30, 2022. (Photographer: Ting Shen/Bloomberg via Getty Images / Getty Images)

That decision was complicated by the stunning implosion of Silicon Valley Bank and two other banks earlier in March, because the rapid rise in interest rates played a direct role in the bank's failures. Increasing interest rates threatens to exacerbate instability within 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 that exceeded the FDIC's $250,000 insurance limit. The Fed also launched a new emergency backstop for lenders to help them meet deposit withdrawals under favorable terms.

FUND MANAGERS WORRY SYSTEM CREDIT CRUNCH COULD CRASH US MARKETS

The moves were intended to staunch a flow of funds from small and regional U.S. lenders as customers rushed to banks deemed too big to fail. However, smaller banks are still feeling the sting from the industry-wide turmoil.

“When combined with the higher cost of debt and deposits due to rising rates, consider what the impact will be on lending rates and our economy,” Ackman said. “The longer this banking crisis is allowed to continue, the greater the damage to smaller banks and their ability to access low-cost capital.”

William Ackman, founder and CEO of hedge fund Pershing Square Capital Management, speaks during the Sohn Investment Conference in New York, on May 4, 2015.  (REUTERS/Brendan McDermid / Getty Images)

He added: “Trust and confidence are earned over many years, but can be wiped out in a few days. I fear we are heading for another a train wreck. Hopefully, our regulators will get this right,” he added.

Fed policymakers said it is too soon to say how banking sector stress will affect the broader economy.

“Financial conditions seem to have tightened and probably by more than the traditional indexes say,” Chairman Jerome Powell told reporters during a post-meeting press conference. “The question for us, though, is how significant will that be – what will be the extent of it, and what will be the duration of it?

“We’ll be looking to see how serious is this and does it look like it’s going to be sustained. And, if it is, it could easily have a significant macroeconomic effect, and we would factor that into our policy decisions.”