Hedge Fund Manager: Everyone Expects Higher Rates To Slow Inflation, But What If The Opposite Happens

By Eric Peters, CIO of One River Asset Management

“Before the 2008 financial crisis we looked at the Taylor Rule as an indicator of where Fed Funds would be,” said Lindsay Politi, One River’s inflation portfolio manager. “It’s not a complicated formula, it calculates the appropriate policy rate based on how far away inflation and unemployment rates are from target,” she said, our Bloomberg’s aglow. “The problem, of course, came in 2009 when the Taylor Rule said Fed Funds should have been around -5%. Knowing that was unachievable, all the alternative monetary policy tools were developed.”

“If the post-QE world looks more like pre-2008, there may be value in looking at those models again,” continued Lindsay, the two of us exploring alternative ways of looking at markets. “The Taylor Rule says Fed Funds should be 9.65%. EU rates should be 11.65% vs 4% today, UK rates should be 13.60% vs 5%.” Japanese rates should be 5.85% vs 0% today.