Below is a chart and brief excerpt from today's Early Look written by Macro & Financials analyst Josh Steiner.
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Guess what happens one week from today? The Fed will make its final asset purchases. To be a bit more quantitative about it, various researchers have undertaken to convert the impact of QE to interest rate policy. One such measure comes from the researchers Jing Cynthia Wu and Fan Dora Xia, who now publish the Wu-Xia Shadow Federal Funds Rate through the Atlanta Fed. As of September 2021, the Shadow Fed Funds rate stood at -1.8%. As of January 2022, it stands at -0.2% and that only reflects a halving of the purchasing volume from $120B/mo to $60B/mo. As such, there has already been an effective rate hike of 160 basis points – or roughly 6 quarter point hikes. Once we realize/remember that the Fed has already effectively hiked rates by a point and a half in just the last 3-4 months, it becomes easier to see that we’re further along in the tightening process than it would seem. This is a big part of why we see the Fed having already committed the policy mistake and is unlikely to go through with the ~5 additional rate hikes expected over the coming year. |
