It was exactly One year ago today, that I called out the FED and said they needed to do Shock & Awe(raise 25 basis points and stop QE) and start raising interest rates. They didn’t and waited for a number of additional months before they started to do so. They were well behind the curve, which caused them to become overly aggressive to catch up to the obvious inflation. Now, as a result of this overly aggressive level of tightening over such a short period of time, combined with significant QT, the real Fed funds rate(combination of the current 4% rate and level of QT) means the effective Fed funds rate is around 6%. The FED should only raise 25 basis points this week and then pause (basically stop but call it a pause pending future data). That future data will show the economy dropping sharply and the FED has once again, got it wrong. They went with loose policy for way too long and then went bat shit crazy in the opposite extreme, to try and correct their mistake.  Just as they didn’t follow my prescription last year they will probably stick with the 50 basis points telegraphed at the last meeting. By the time the following meeting takes place in early February, it will be clear the economy and inflation are slowing dramatically.

Shock & Awe