Despite all this criticism, I agree with the overall concept of shorting bonds. The fed is getting waaaaayyy behind the curve. QE is still going on at this moment, even after months of high inflation readings and oil still rising fast at $110/barrel. AND now we're basically committed to only a quarter-point rate hike this month. It may be reasonable to expect that the Fed will have to play catch-up in late 2022 / early 2023.
I believe the Fed member "dot plot" shows an expectation for 4 rate hikes, but we'll know more after this months' FOMC meeting. I believe the market expects 5-6 rate hikes. Is there a risk the "catch-up" is already priced in?
The Fed's dot plot has been a notoriously bad predictor of future interest rates since its inception. The catch up would be necessary if inflation persisted in the 7% range (as is being predicted for 2022) while the Fed only ratchets up rates to 1% or 1.25% this year.
By year two of high inflation and a weak Fed response, the dreaded expectations of future inflation would kick in. Consumers would start hoarding and getting rid of cash, setting off a demand spiral. Political pressure could build to replace Jerome Powell with the next Paul Volker archetype.
I think the Fed is being prudent in not treating 2021's inflation numbers like an emergency. The end of various pandemic stimulus programs in 2022 is in itself a form of QT relative to 2021. In addition to that, the Fed will stop buying bonds and mortgages next month. I don't think anybody knows how quickly the new money from stimulus packages will slowly leak out of the real economy and into the accounts of rich people and foreign governments where it will stagnate and stop affecting prices. "At the rate of the $859B US trade deficit" plus investment inflows is a good guess, but still only approximate because it does not account for a lot of other factors. Thus, nobody exactly knows the effect of stopping stimulus cold turkey on monetary velocity. The Fed is only aiming for its 2-2.25% "neutral" Fed Funds Rate because (a) they want ammo for the next crisis, as the theory goes, and (b) they have literally no idea what the inflation numbers will look like in the 2nd half of 2022. This is uncharted territory.
If the Fed raises rates too fast, or sells too many assets of their balance sheet, we could be back in a struggle against deflation before we know it! OTOH, if the Fed lets inflation expectations become entrenched after a couple of years' inaction, they could set off a spiral and we re-live the 1970's and early 80's. The current explosion in the price of commodities looks a lot like 1973 in its potential to make everything more expensive at a faster rate than the Fed is willing to raise rates. If oil starts heading toward $200/barrel and inflation starts heading to 10%, the concept of quarter-point rate hikes will seem quaint. There are a lot more ways for the Fed to get it wrong than there are for the Fed to get it right.
I wake up in the morning, kneel next to my bed, and pray "Lord, please help me to never, fucking ever, fight the Fed." That's why I have a hard time holding an aggressive stock portfolio right now, and why I'm skeptical of bonds. Such positions might be fighting the fed by this summer if the inflation numbers continue to increase. Bear spreads on TLT seem like a good way to earn a modest speculative return. This approach would also cap potential losses and spread risk more carefully across time. A significant inflation/rates jolt may lie ahead, and I haven't a clue which way it'll go.
