Summary

Historically, the FED's tightening campaigns have always broken something. So far, 450bps of rate tightening, and 650 Bln US$ of Balance Sheet Reduction, and still nothing has broken, which raises the question, has something fundamentally changed? Monetary expansion favouring fiscal austerity, acts as a drag on growth and inflation, resulting in supporting lower interpretations of R*, and gives the illusion to DM Central Banks that the post-Covid monetary bazooka will have the same side-effects as post-GFC. The global answer to Covid was an unprecedented fiscal stimulus. The Russian Invasion of Ukraine has incentivised local Governments to bring back consumer benefits / price caps / nationalisations and has worked against DM policymakers, earlier efforts to tame inflation. Weaponisation of the FX reserves results in a quest for an alternative to the US$ predominance, leading to a less favourable supply / demand dynamic for US$ denominated debt The implications of a higher R* are the FED is not as much in restrictive territory as thought, higher for longer, higher rate term structure, higher term premium and the further away from the ZLB rates stand, the more countercyclical breathing room the FED will have when monetary policy needs to be eased = lowering the chances to go back to massive LSAP / QE. Cash is King!

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