Why The Fed Should Hike By 50 BPS

Why The Fed Should Hike By 50 BPS

The sooner the Fed gets to where it is going, the sooner it may pause and observe. In addition, Treasury yields remain negative across the yield curve which is not long-term healthy for the economy.

The Effective Fed Funds rate range stands at 4.25-4.50%. If the Fed believes that the upper bound should sit at 5.00%, I believe the Fed should raise the range by 50 BPS on Wednesday rather than 25 BPS on Wednesday and another 25 BPS next month. The sooner the Fed reaches its target range, the sooner it may pause and observe the economic impact of its actions (rate hikes combined with QT).

Do not underestimate the impact of QT. As we wrote yesterday, asset values will decline as the money supply shrinks. So too will economic activity (which we have started to see), and price inflation. While I’m confident that 2% CPI is not around the corner, we can bring CPI down materially from its current level and move the economy into positive real interest rate territory through a combination of QT and normalized interest rates.

It is important to have positive real interest rates as real rates allow investors/savers to earn a real return on all fixed income securities – including Treasuries and Investment Grade instruments – not just risky High Yield securities.

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