Bill Ackman Is Hedging Against What He Says Is 'The Biggest Risk To The Markets'

Although the Federal Reserve hiked interest rates by 75 basis points for the second consecutive month last week, Pershing Square's Bill Ackman believes the central bank still needs to be more aggressive. 

"I think the biggest problem for the economy is inflation and inflation is roaring. It's continued to rage and unfortunately, the steps taken by the Federal Reserve have not been effective," Ackman said Monday on CNBC's "Squawk Box."

What Happened: The Federal Reserve hiked rates by 0.75% last week, bringing its target fed funds rate up to a range of 2.25% to 2.5%.

When Fed Chair Jerome Powell said he was comfortable with rates after hiking to a neutral level, Ackman saw a red flag.

"A fairly extraordinary statement in a world with 9% inflation," Ackman noted. 

In order to cool down the highest inflation numbers in 40 years, the hedge fund manager said the Fed has to do more. 

"I think the Fed has to be aggressive in raising rates, getting to something probably with a high threes, four handle," Ackman said.

"I think rates are going to have to stay 4% plus for the foreseeable future, you know, 12, 18 months or so in order to kill this inflation, and they may need to take rates higher."

See Also: U.S. Job Openings Might Ease Further To This Level In June, Here Are The Major Macro Issues For Tuesday

Why It Matters: Ackman told CNBC that investors aren't accounting for the potential for rates to remain elevated well above current levels for an extended period of time. 

"The biggest risk to the markets is that people are not pricing that in," Ackman said. 

The billionaire investor expects inflation to persist in the mid-single digit range for a "long time," he said, adding that he has hedged his portfolio accordingly. 

"We have an interest rate hedge in place ... our implicit bet is that short rates have to go higher than the market is pricing and so we have a bet, if you will, or hedge, if you will, that pays off as the 2-Year rate goes higher. We also have a hedge where if 30-year rates go higher than people expect ... we also profit. That's kind of a hedge against the hedge," Ackman said.

Photo: Bill Ackman, CNBC screenshot