FS Insider interviewed macro economist Christian Takushi this Wednesday 12 January 2022 at 3 PM GMT to discuss FED Policy and Interest Rates. Christian explains how markets are unprepared for what is coming. Misled, they are focusing on guessing the number of rate hikes - which is not really the issue in 2022. Consensus thinks the FED has had a change of heart on inflation, it will hike rates 3-4 times during 2022, but if markets crash, the FED will immediately rescue them.
Christian believes FED chair Powell is only deviating from his script, because of massive pressure from his new boss, President Biden. It is about politics. Americans are furious about rising inflation and they are on track to hand over both the House and the Senate to Republicans this November. Thus, the FED has to shock markets within the next 6 months, not 12 months. The FED may allow interest rates to overshoot in the 1st half 2022 to achieve this! Christian expects a rate shock outside of the FED schedule. What matters most in 2022 is the degree of surprise.
After taming inflation the FED wants go back to over-stimulating the economy and printing money. Thus, while the FED doesn't want sustained high interest rates, it surely could use a strong interest rate spike before August 2022 - that opens the door for more monetary and fiscal stimuli after the Fall. Without excessive liquidity and stimulus G7 economies will otherwise shrink - thus, inflation and negative growth would set in (stagflation). Both FED and ECB are working together for years to create inflation, letting it run hot (by keeping rates near zero while inflation runs at 7%) and taming markets with "we will hike interests rates next year".
In a nutshell, the high inflation we are facing around the world has been induced by central banks and aided by the financial industry's rush into ESG and green investments. Good idea, but flawed implementation - For over one decade energy companies among many other industries have not been investing enough in facilities. Banks and investors wouldn't even lend them the money. Now, in desperation a totally Russia-dependent Europe is trying to put nuclear and coal plants back on the grid. The same they did with Europe's military. Another example of Europe's lack of strategic foresight.
