Billionaire investor Bill Ackman is betting the Federal Reserve will begin cutting interest rates sooner than markets are predicting.

The Pershing Square Capital Management founder said such a move could happen as soon as the first quarter. Traders are fully pricing in a rate cut in June, with the chance of a reduction in May priced at about 80%, according to swaps market data.

“We’re betting that the Federal Reserve is going to have to cut rates more quickly than people expect,” Ackman said in an upcoming episode of The David Rubenstein Show: Peer-to-Peer Conversations. “That’s the current macro bet that we have on.”

The Fed began aggressively raising rates in March 2022, leading to the fastest pace of rate increases in 40 years. The central bank has yet to cut borrowing costs even as US inflation has broadly slowed this year.

“What’s happening is the real rate of interest, which is what impacts the economy, keeps increasing as inflation declines,” Ackman said.

Treasury markets have rallied in recent weeks, with 10-year yields falling more than 70 basis points since the intraday peak over 5%. Before Ackman’s dovish views came out, the market was pricing in an 80% chance of a Fed rate cut by May 2024 and a full cut by June. Now the market is pricing almost a full cut for May, though that’s still short of the first quarter.

Ackman said that if the Fed keeps rates in the roughly 5.5% range when inflation trends below 3%, “that’s a very high real rate of interest.”

Ackman, 57, founded Pershing Square in 2004. The firm, which manages about $17 billion of assets, made its name in shareholder activism, but Ackman said he prefers to think of his team as “engaged owners” of businesses rather than hard-charging activists.

The firm has made a number of macro bets over the years. Ackman said in August that he was short 30-year US Treasuries, a call that proved prescient as rates rose almost a full percentage point over the next couple months. In October, Ackman moved the market when he tweeted that the firm had covered its short bet on US Treasuries.

Other predictions haven’t yet panned out. A year ago, Ackman said his firm had a large position betting against Hong Kong’s pegged dollar, but that currency is still within its trading band.

Ackman told Rubenstein he’s not convinced the US economy is headed for a so-called soft landing, a scenario where the Fed raises interest rates without triggering a recession.

“I think there’s a real risk of a hard landing if the Fed doesn’t start cutting rates pretty soon,” said Ackman, noting that he’s seen evidence of a weakening economy.

--With assistance from Edward Harrison and Edward Bolingbroke.

(Adds market reaction in fifth paragraph.)