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‘Tough sledding’ ahead for high-flying inflation trades, says investor who called ’87 stock-market crash

MarketWatch logo MarketWatch 1/11/2022 William Watts
Paul Tudor Jones holding a keyboard © Bloomberg
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‘I know that I think it’s going to be tough sledding for the inflation trades, the pandemic going forward. So the things that performed the best since March of 2020 are going to probably perform the worst as we go through this tight tightening cycle.’ — Paul Tudor Jones, Tudor Investment Corp.


Video: Bank of England could hike interest rates twice in 2022: Economist (CNBC)

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Billionaire hedge-fund manager Paul Tudor Jones expects it to be an interesting tightening cycle as the Federal Reserve and Chairman Jerome Powell play catch-up after inflation surged well above the central bank’s 2% target, where it’s expected to remain for some time.

Jones, in an interview with CNBC, said that, on a relative basis, he doesn’t know whether those assets will “go down or up,” but that they’re “clearly going to be challenged” if the fed-funds rate rises to 2% over the next two years. ”

Jones, who won fame for predicting the stock-market crash in October 1987, has been a sharp critic of Powell and the Fed, previously complaining that policy makers were “inflation creators not inflation fighters.”

Read: 4 mistakes the Powell Fed made—from a former insider

Now that the Fed has pivoted to tightening monetary policy, Powell and his fellow policy makers are going to scramble to catch up, Jones said Tuesday.

The last time the unemployment rate stood at 3.9%, fed funds were at 1.75% and on the to a peak of 2.5%, Jones said, while the 10-year Treasury yield was at 3%. The fed-funds rate now stands in a range of 0% to 0.25%, while the 10-year yield recently tested the 1.80% threshold.

Powell is “going to play catch-up. And he’s got a lot of catching up to do, and I think that’s why you’re seeing them talk about quantitative tightening, because I don’t think he can catch up fast enough to try to deal with the inflation problem that he has right now,” Jones said. Quantitative tightening refers to the Fed shrinking its balance sheet, which has expanded sharply since the pandemic took hold as a result of the central bank’s quantitative easing measures.

The Fed is winding down its monthly asset purchases as it brings the latest episode of quantitative easing to a close. Minutes of the Fed’s December policy meeting showed that officials had discussed moving quickly to begin winding down the balance sheet once QE is brought to a halt, a topic that’s also been raised by Fed officials in public remarks.

Stocks have wobbled in the new year as investors have penciled in for a more aggressive Fed, but equities appeared to find their footing Tuesday. The Dow Jones Industrial Average was up around 115 points, or 0.3%, while the S&P 500 rose 0.7% and the Nasdaq Composite jumped 1.3%.

Powell, who has been nominated by President Joe Biden to serve a second term as Fed chief, told the Senate Banking Committee Tuesday that the central bank’s plans to raise interest rates should not throw a wrench in the economy or damage the job market. Powell was testifying at his confirmation hearing; he’s expected to win approval from the full Senate.

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