Ops before FOMC: The Fed won't hike rates as much as expected
Sigrid Jin
0x39D9
January 26th, 2022
https://realinvestmentadvice.com/rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected/
https://realinvestmentadvice.com/rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected/
  • When looking up the graph of the M2 Money Stock-CPI chart, one can easily notice that inflation surged almost exactly 9 months later.
  • This fact might suggest that the M2 money stock indicator would suggest a correction to the recent inflation spike, while suggested inflation will remain rampant this year.
  • When only considering financial factors, not political affairs (i.e. Russia v US in Ukraine battlefield), the deflation pressures are likely to come sooner than has been expected.
https://realinvestmentadvice.com/rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected/
https://realinvestmentadvice.com/rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected/
  • Behind the scene is the contraction in liquidity; recurring large rounds of fiscal stimulus have been the key component of demand growth, but it has been declined.
  • The aggregate demand would dissipate substantially; supply might come back as normal assuming that supply chain issues caused by geographical issues have not impeded significantly.
https://realinvestmentadvice.com/rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected/
https://realinvestmentadvice.com/rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected/
  • The economy will be weaker than previously assumed if the labor force participation rate remains such a low - this means that if the Fed tightens monetary policy aggressively, the Quantitative Tapering strategy will likely decrease growth rates faster than expected.
https://realinvestmentadvice.com/rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected/
https://realinvestmentadvice.com/rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected/
  • The market already believes that the aforementioned case will come soon, forecasting that rate hikes would stop by the end of 2022.
  • The Fed is only required to hike fewer fund rates to bust inflation, even when usually with recession. As shown below, since 1982, the campaign to hike fund rates comes with 1) recession, crisis or bear market 2) the level at which rising rates triggered an economic crisis has always been lower than the previous quo.
https://seekingalpha.com/article/4481337-rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected
https://seekingalpha.com/article/4481337-rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected
  • If the Fed boosts interest rates to stop the inflationary spiral, it will quench economic development. In the past, higher rates have been associated with more negative market results. This is especially true when valuations rise and interest rates remain low, which supports the optimistic view.
https://seekingalpha.com/article/4481337-rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected
https://seekingalpha.com/article/4481337-rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected
  • A reversal in Fed policy has repeatedly presented bond-buying opportunities during the last decade." Historically, rates have risen under Quantitative easing programs as money has been redirected from the bonds to equities, which is at risk. When those QE programs expired, rates dropped as investors' risk appetites shifted."
https://seekingalpha.com/article/4481337-rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected
https://seekingalpha.com/article/4481337-rate-hikes-the-fed-wont-hike-nearly-as-much-as-expected
  • While the Fed is likely aware that it should not be raising rates aggressively, the belief is that it will continue on its current path. While rising rates may hasten a future recession and large market correction, from the Fed's standpoint, it may be the lesser of two evils - the consequence is bad but not as bad as other choices.
Subscribe to Sigrid Jin
Receive the latest updates directly to your inbox.
Verification
This entry has been permanently stored onchain and signed by its creator.
Arweave Transaction
AR5L6H2A1f_ahNE…u6DAW7lvyatT32I
Author Address
0x39D95dB2824c069…e6FC0D7639d9359
Content Digest
ftFOxbBkFrIWLW0…LM5EYCtOd06u1s4