Bill Ackman Just Said 4 Words Blasting the Fed's Latest Rate Hike: "Just Made a Mistake." Here's Why He Thinks Higher Rates Could Backfire on AI-Driven Inflation.

On Sept. 16, the Federal Reserve raised the federal funds rate by 25 basis points to a range of 3.75%-4.00%, marking the central bank's first rate hike since July 2023. The vote was unanimous, 12-0.

The rate increase was made in an effort to tamp down inflation, which has been running above the Fed's 2% target for the past five years.

However, famous value investor and Pershing Square Management (NYSE: PS) CEO Bill Ackman thinks the Fed is making a big mistake. According to a recent social media post, Ackman worries that the recent rate hike may backfire, worsening inflation. Here's how that could happen.

Bill Ackman. Image source: Getty Images.

Why rate hikes may not work this time

The reason interest rate hikes have historically tamped down inflation is that when the cost of financing and credit rises, consumers and businesses tighten their belts and spend less. Lower demand keeps prices in check and lowers inflation.

However, Ackman doesn't seem to think the traditional inflation playbook will work in the age of artificial intelligence. Last week, Ackman took to X to write his thesis:

The presumption that the Fed raising short-term rates reduces inflation is predicated on the belief that higher rates reduce demand and investment.

But what if higher rates don't reduce demand and investment because the demand for intelligence and energy is unaffected by higher rates because winning the race for super intelligence has a near infinite ROI and the demand for compute will remain incalculable...

-- Bill Ackman (@BillAckman) September 25, 2026

Ackman goes on to explain that higher rates tamp down inflation when demand is elastic. But since large tech companies are all racing to be the first to achieve artificial general intelligence (AGI), demand for AI data centers may be inelastic today. In other words, the Magnificent Seven and the start-ups pursuing AI supremacy will continue to spend massive amounts on AI compute regardless of interest costs.

If demand is unaffected, Ackman concludes that higher interest rates will be reflected only in the costs of AI products and services, thereby increasing inflation rather than lowering it.

Is he right?

Data centers are typically funded with longer-term interest rates, say, three, five, seven, or 10 years. So, it's the long end of the yield curve that may matter more for tech company corporate debt than the short end, which is dictated by the federal funds rate.

That long end rose over the summer and likely served as a catalyst for the Fed's rate hike. Yes, "sticky" inflation may play a role in rising bond rates, but other factors are likely at work as well. Soaring U.S. debt may have prompted investors to question the U.S. government's profligacy and demand a higher term premium. Additionally, waves of debt issued by large companies to fund the AI build-out have increased the overall supply of debt available to investors. Greater supply with stable demand means bond prices must decrease and interest rates must rise to "clear" the market, even in the absence of inflation.

So, Ackman may, in fact, have a point that inflation isn't the primary cause of this summer's increase in bond rates.

However, inflation expectations likely played some role, even as it's difficult to tease out the impact of all these factors. Moreover, the employment picture remains quite good today, despite anxieties over AI displacing workers. Full employment is a lower-risk environment in which to raise rates.

In essence, we are in unprecedented territory, both in terms of the U.S. debt picture and the AI build-out. Therefore, investors should contemplate all possibilities. While Ackman's theory is interesting and should be considered, it's also possible that the traditional playbook for fighting inflation will work to some degree.

Investors should keep an open mind and closely monitor inflation data and bond rates in the months ahead.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.