"This Is Shocking": Quant Guru Calculates Fed Can Only Hike To 1% Before It Must Halt The Cycle

Earlier today, futures slumped to session lows (before an algo driven meltup sent stocks soaring to session highs) when the Fed's resident uberhawk and FOMC dissenter, James Bullard, poured more overpriced gasoline on the tightening fire when he said that “the current policy rate is too low by about 300 basis points" according to a version of the Taylor rule which showed that the Fed has a long way to go to catch up to where it should be if, somewhere around 3.5%, it has any hopes of denting runaway inflation around 8%, which as shown below sounds about right considering the last time inflation was here, the fed funds rate was 12%.

"This Is Shocking": Quant Guru Calculates Fed Can Only Hike To 1% Before It Must Halt The Cycle Fed%20funds%20vs%20CPI_2

"This Is Shocking": Quant Guru Calculates Fed Can Only Hike To 1% Before It Must Halt The Cycle Fed%20funds%20vs%20CPI_2

While Bullard's comments were not surprising - we already knew that he had dissented in favor of a 50bps rate hikes in March - comments by Lael Brainard, regarded as the most dovish of all Fed Governors, shocked the markets on Tuesday when she highlighted the likelihood the Fed will undertake a more rapid shrinkage of its balance sheet than markets were expecting.

Here, one obvious question is whether the Fed can hike anywhere close to 12% - or even 3.5% - without crashing the entire financial system. Another question is whether the Taylor rule is applicable in such a unique situation where not only are rates still at rock bottom but the Fed has some $9 trillion in securities on its balance sheet. Indeed, while the prevailing hawkishness across the FOMC means monetary policy will be tightened faster than expected, a third question is how much faster, or in other words, "what is the trade-off between QT and higher Fed Funds? Surely the faster the balance sheet is shrunk, the fewer rises will be needed in Fed Funds."

According to at least one Wall Street strategist, the answer to these questions is also the reason why the Fed Funds rate won't climb beyond 1.0%!

We refer to SocGen's resident permaskeptic, Albert Edwards, who today writes that "the prospect of the Fed engaging in rapid balance sheet shrinkage (QT) has spooked the markets." But, as we muse above, how does one combine the concurrent impact of QT with the Fed Fund hikes to get a handle on where Fed Funds might peak?

Well, Edwards believes he may have the answer, or rather he says that his "learned colleague", SocGen's in house quant guru Solomon Tadesse has an answer. While few in the mainstream have ever heard of Solomon, back in mid-2018, not long before the Fed's rate hike plans blew up spectacularly, the SocGen quant made waves on Wall Street trading desks when he went against the consensus view, and in May 2018 pinpointed the peak in Fed Funds at a lowly 2½%. He was absolutely spot on.

The problem: his latest analysis for this cycle puts the peak of the Fed Funds at just below 1.0%, or less than 3 more rate hikes before the Fed is forced to reverse! That, as Edwards notes, "is so far away from the current consensus that it deserves some serious analysis."

"This Is Shocking": Quant Guru Calculates Fed Can Only Hike To 1% Before It Must Halt The Cycle Headline%20inflation

"This Is Shocking": Quant Guru Calculates Fed Can Only Hike To 1% Before It Must Halt The Cycle Headline%20inflation

.https://www.zerohedge.com/markets/shocking-quant-guru-calculates-fed-can-only-hike-1-it-must-halt-cycle

"This Is Shocking": Quant Guru Calculates Fed Can Only Hike To 1% Before It Must Halt The Cycle

"This Is Shocking": Quant Guru Calculates Fed Can Only Hike To 1% Before It Must Halt The Cycle

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