Hedge fund mogul Bill Ackman tweeted that the Fed should raise interest rates by 50 basis points in March.

Salomon Brothers Chief Economist Henry Kaufman, known as Dr. Doomsday, also pointed out in an interview with Bloomberg that if he were an adviser to Powell, he would urge the Fed chairman to take "drastic measures", starting with an immediate 50 basis point increase in interest rates.

If the Fed does raise interest rates by 50 basis points at that time, it will be the most aggressive monetary tightening by the Fed since May 2000.

Will the Fed really be an eagle to this extent?

Peter Hooper, head of global economic research at Deutsche Bank, and Matthew Luzzetti, chief US economist, released a report on Tuesday.The Fed may raise interest rates faster than expected, or even at some stage50A basis point.

A more positive shift

Deutsche Bank pointed to data that could trigger a more positive response from the Fed.In a broad sense, data that prove that inflationary pressures are becoming deeply entrenched and that the Fed's expectations of a faster decline in prices are undermined by the new inflationary mentality are the most important.

Specifically, data that could trigger a more positive Fed response in the coming months may include:

1. The employment cost index (ECI) grew at its highest quarterly rate in a decade.

two。 The month-on-month inflation data show little sign of easing, especially when service sector inflation (such as rents and open exchange rates) is higher and the inflation trend indicator is well above 3%.

3. Indicators of inflation expectations rise further, sparking fears of unanchoring

4. The labour market continued to decline, and the unemployment rate quickly fell to a 50-year low before the epidemic.

In Deutsche Bank's view, while items 1 and 4 are likely to happen, they will not touch the bottom line of the Fed; instead, the Fed wants to see inflation ease and inflation expectations do not continue to rise.

However, the current inflation risk is clear, with core CPI soaring to its highest level in nearly 40 years, consumer confidence at the University of Michigan fell in January and inflation expectations hit a 10-year high.

So Deutsche Bank thinks the Fed is likely to change more aggressively in the coming months.

In this case, what will be the more radical response? Can the Fed raise interest rates at the meeting by more than 25 basis points or in a row? Can balance sheets be used more aggressively to tighten financial conditions?

So what is the most likely scenario?

Two analysts at Deutsche Bank said:

"the most likely scenario is that the Fed will raise interest rates at every meeting starting in March this year," he said. "if (inflation) data develop along this risk scenario and do not subside in the second half of the year, thenInterest rates will be raised six to seven times this year”

In addition, according to Deutsche Bank,The Fed may decide to announce early cuts in its Treasury portfolio, possibly as early as its March meeting, and quantitative tightening (QT) in the second quarter.

In addition to accelerating austerityThe Fed may not use its balance sheet more aggressively to tighten policy under such circumstances.

Deutsche Bank explained that in the current environment, such a restrained pace might avoid imbalances and thus achieve a "soft landing" without accumulating financial fragility.

It is worth mentioning that this will not make the policy neutral before the end of the year.But it won't be too far from neutral.By the first half of 2023, policy will be neutral even if higher inflation is taken into account.

While this will undoubtedly tighten financial conditions, Deutsche Bank believes it is desirable from the Fed's point of view.

The reason is that it will enable the Fed to learn more about the uncertainty about the outlook and the impact of its actions on financial markets, such as whether supply problems are being resolved and how faster contraction affects the market. and whether the neutral federal funds rate is really as low as the market suggests.

Can Powell strike pre-emptively?

Deutsche Bank believesIt is still possible for the Fed to enter1990The larger model of raising interest rates in the mid-1970s, that is, an one-offRaise interest rate50A basis point.

In the mid-1990s, in order to curb excessively high inflation, the Federal Reserve began to raise interest rates seven times in a row since the beginning of 1994, raising the federal funds rate from 3 percent to 6 percent, by 300 basis points.

Since then, in order to curb the dotcom bubble, the Fed has raised interest rates six times since 1999, during which the federal funds rate has risen from 4.75% to 6.5%, by 175 basis points.

PeriodGreenspan, then chairman of the Federal Reserve, raised interest rates by 50 basis points or even 75 basis points at a time.

Can Powell, the current chairman of the Federal Reserve, be as pre-emptive as Greenspan?

Deutsche Bank said that this possibility is small, raising interest rates by 50 basis points needs to meet the following conditions：

1. There is clear evidence that inflation has broken down and the inflation data have not improved.

two。 Long-term inflation expectations rise sharply

3. The labor market is becoming more and more tight.

But it's still possible.

"the risk that the tightening cycle may be more aggressive than Fed officials imply and the expectations contained in our own basic assumptions has clearly risen."

For the market, Tuesday's equity-debt double kill means that the scope of monetary policy has been greatly expanded, and the anchoring guidance provided by the Federal Reserve for the yield curve may not be effective.。

Treasury yields rose across the board on Tuesday, with 10-year yields rising to 1.85%, the highest level since January 2020. European and American stock markets weakened, with the S & P 500 index futures falling by 1% and the Nasdaq futures down more than 2%.

As Deutsche Bank concluded:

"the possibility of more volatility from the Fed has risen to1990The highest level since the mid-1990s. "