🏦 Fed and ECB are in a much tighter posture a year from now

“So this is it. And I think that probably the Fed and the ECB are really raising. This time next year, they're probably in a really, really tighter posture.”

“But I actually think that the degrees of action that the Fed can take here might be more constrained than people think.”

“And if the Fed stops tapering and, you know, hikes rates two or three times over the next 12 or 18 months, man, this is an ugly, ugly stock market.”

“So there's going to be enormous pressure on the Fed not to raise rates. You already are hearing Biden rattling the saber saying that Pal may not be his choice for a second term. By the way, Pal is very dovish.”

“For the first six months of the year, all you heard out of Washington, the administration, was this inflation was transitory. That story has basically collapsed because now people can see that it's persistent. ... They're now pricing in the risk of interest rate increases.”

“And here's another thing is the Fed is now saying that they're projecting two to three rate increases next year. So let's call that 75 basis points, multiply that by the close to 30 trillion of government debt”

“we now see a Fed posture, which is actually pretty reasonable, which actually says, oh, wait, there's way too much money in the system as it is. ... the Fed two days ago basically said, we're going to see up to three rate hikes next year, probably 50 basis points each. ... we have printed way too much money and they're trying to fix the problem that they created”

“now the Fed a couple of days ago finally gave us clarity. I mean, what they basically said is they're going to accelerate the taper. They'll end quantitative easing at the end of Q1 ... So when they stop doing that, I think you can expect that, you know, interest rates are going to need to rise in order to make our debt attractive to, you know, to bond buyers.”

“Clearly, Powell does not want to be remembered as the Fed chief that let inflation slip the leash, right? I mean, he's gotten religion now around the idea that this inflation is not transitory, which was his position for months.”

“if you looked at the trading prices of bonds, you probably would have assumed a 95% chance of a half point rate hike in March. And as of today, my guess is that the probability of that is below 5%. ... And so this is not a great time to do a half point rate hike. And so it's almost certain at this point that they're not going to do a half point rate hike.”

“he said he's going to raise by 25 basis points in March. Everybody knew that, right? So we took the 50 basis pointer off the table. But then he was very clear that they were going to be data driven. ... I think there could be a real possibility that Powell becomes very accommodative. ... he and Biden and the entire administration come together with Europe and everybody else and say, get the money printer back going”

“You can't really drop interest rates much more. And if you do, you'll get much worse inflation. So it seems to me that we don't have a lot of tools here.”

“So I think what the Fed's going to do is get even more aggressive. You're going to probably see, you know, a lot of 50s, maybe even a 75 point hike”

“How do you raise rates 400 basis points into a slowing economy? You could raise basis points 75, you know, 75 bits, maybe 100 bits, but it gives them very little freedom to operate without really tanking the economy.”

“But the point is the Fed is in a really tough spot here because it feels like we're going into recession, which would normally mean you cut rates, but then you've got inflation demanding that we jack up rates far more.”

“I think you need to buckle your seatbelt because the next three, four, five months of CPI will probably be very, very bad. ... So they will overcorrect because there is just going to be so much pressure for them to act.”

“And this is why I think the Fed is probably more likely to overshoot on raising rates is because if they really want to stop inflation now, they really have to slam on the brakes.”

“We've never in the history of America ever had CPI print above four and a half or five percent without inflation being brought down by having Fed funds not also be greater than four and a half or five percent. So at some point, inflation will turn over and will print six and seven percent, but that's still not below four and a half or five.”

“I'll say it again. I've said it now five pods in a row. We've never seen a moment in history, in American history, where when CPI has printed successively above 5%, that it got under 5% without Fed funds getting to that same number. So we should all hope that this is the exception that proves the rule, but there's an enormous amount of data that would tell you that we have to take rates to double what the equilibrium rate is thought to be right now.”

“The thing about that is though that I think what the PAL and what the Fed says today about rates is way less important than what the inflation data will actually show in a few months. If we still have 9% inflation three months from now, then I don't think the rate increases are done.”