The Fed is promising $1T of quantitative tightening over the next 12 months? Who are they kidding?!
Leverage finance markets are near frozen. Only two junk bonds have priced in May in the U.S high-yield bond market. There are no deals currently in the pipeline, per institutional clients in our live chat on Bloomberg.
“The Fed intends to aggressively normalize monetary policy, with simultaneous rate hikes and an ambitious balance sheet runoff schedule. The goal of the Fed is to dispel the growing belief in the markets that the Fed is behind the curve and inflation is becoming anchored in the economy. We believe that the Fed can maintain this aggressive pace of QT only for a very short period. We base this on the shadow Fed Funds rate, which incorporates both QE and interest rates, and the most recent experience with QT in 2018. In that period, the Fed could only maintain full-on QT (rate hikes + balance sheet runoff) for one quarter before it had to reverse course.
The Fed has proven itself OVER and OVER and OVER again to have misjudged financial conditions and financial stability risks. They routinely over-promise and underdeliver because they are clueless academics who have NEVER taken professional risk, never actually sat in a risk-taking seat, and are FAR more comfortable talking up meaningless, BACKWARD looking economic data. Their pawns on Wall St. (Timiraos at the WSJ, Goldman’s Hatzius, the financial media – sell-side sheep complex) only embellish the endless lines of bs. If you measure credit risk, counterparty risk, and financial plumbing conditions, in a very short period of time – if what has been transpiring over the last few weeks continues – the FED WILL break something. We were lectured, 25, 25, 25, then 50, 50, 50 then 75, 75, 75. All with $1T of QT in 12 months. This is a total bs overdose. The Fed must use hot air and their pawns effectively because, in reality, they cannot achieve anywhere near what they are “sales pitching” without creating another Lehman-like event. The Fed is starring down two barrels – 1) accept a higher level of normalized inflation 4-6%, slower growth stagflation or 2) Blow up the global financial system – this is a screaming buy for hard assets.”
“Beware of the Fed´s Pawns” – May 2022
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Just Three 25bps Rate Hikes have Delivered a lot of Stress
Always watch tertiary credit in a crisis. CCCs are out across 12%, after seven straight weeks of losses. Financial conditions are tightening far faster than the Fed realizes. The funding window has shut down. Per Bloomberg, this month is on track to the slowest May since the global financial crisis of 2008. The year-to-date volume stood at $55.3b, a drop of 75% from the comparable period last year. Quality names are taking a beating – the average investment-grade corporate bond spread is at +150 basis points, the highest since July 2020. Credit markets have a veto on your plans Mr. Powell.
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