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How Much Will The Fed Hike? 40 Years Of History Shows The Brick Walls

Tyler Durden's Photo
by Tyler Durden
Thursday, Feb 17, 2022 - 06:45 PM

Authored by Mike Shedlock via MishTalk.com,

How many hikes will the Fed get in? The market expects far too many.

Data from St. Louis Fed, chart by Mish

The above chart shows the Federal Funds Rate (FFR) vs the yield on various US Treasury notes. 

Data is monthly averages except the current point is today. 

Long Term Chart 

I picked this idea up from Steve Matthews, Bloomberg Business Reporter. 

"There is a 50-year history that the Fed never hikes rates once the fed funds rate has risen above the five-year yield. That point could come before the end of 2022, and suggests that it will be very difficult to continue."

Read that carefully. Matthews did not say the Fed Fund Rate didn't top the yield on the 5-year note, only that once it did, the Fed stopped hiking.

Last Rate Hike Cycle

Data from St. Louis Fed, chart by Mish

Pay particular attention to that last hike cycle as shown above. 

Huge inversions started in April of 2019. Those inversions signaled recession well before Covid-19 hit.

The pandemic did not cause a recession, it only steepened the recession that was about to begin. 

Rate Hike Cycles Peak Lower and Lower

It's the Debt, Stupid!

"There are logical reasons why each FF hiking cycle has "died out" at a lower level than its predecessor since the Volcker era. I'm confident this one will be no different. Advanced economies like ours, Japan's, Europe's etc. all in same boat."

Mike Larson, Senior Analyst at Weiss Ratings, hits the key idea.

I can paraphrase: "It's the debt, stupid!" 

The market expects 6 or 7 rate hikes this year to about 1.75%. There's little to no chance of that in my opinion.

[ZH: The market is now pricing in rate-cuts...]

Confident of Three Things

I am confident the Fed is hiking into a recession, the asset bubble will burst, and the Fed once again has no idea what is coming

For discussion, please see James Bullard Says Fed Credibility Is On the Line, Repeats Faster Rate Hike Message

Also see Delusional Fed President Hopes to Steepen the Yield Curve Via QT and Rate Hikes

The yield curve is flattening fast and that will put a top on how far this Fed will hike, inflation or not.

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