Inflation is off the roof. What happens next?

Inflation is touching 40 years high and Federal Reserve is starting to hit risk assets with the big stick. So you might be tempted to call it quits and go cry in the shower.

But the thing is that the Bear market doesn’t last forever.

So, what’s causing inflation?

Everything.

• The covid-China lockdown caused constraints on the supply side. Increased consumer demand.
• The Ukraine-Russia war.
• Wages have gone up and an increase in oil prices

So, the reason Fed had was to increase the interest rate which they did 10 days back to 1.75% now. The next rate hike comes on 26–27th July. Will they hike 50bps or 75bps again?

My Take:

• We could expect another 75bps again as the inflation is still at 8.6% and to counter that FED will continue to raise rates until it reaches 3.4% by the end of the year.
• Both Stock markets and crypto will experience sideways movement for some time until the Quantitative easing starts which we expect to be around mid-2023.

Bear market Mindset:

• Inflation heading back was a surprise to many. Everyone expected a reduced rate. I believe Fed is underestimation inflation otherwise it would have certainly telegraphed a 75bps rate hike.
• But remember, inflation is more a political issue than an economic one. Also, the recent 75bps rate hike was a pretty big signal as this big rate hike has been only three times since 1954.
• So, Fed is pretty serious about the inflation.

We have plotted inflation and interest rate in a graph to give you a clear picture of where we stand in front of inflation.

How many more hikes will happen before QT ends? We calculated that it would be around 3.4% this year but there’s a catch to that. Let's talk about that below.

We looked at the 30-year interest rate trend graph where the Fed never increased the rate above the peak of the previous cycle. Last year the interest was 2.4% so, would they break this trend this year or continue this trend and let inflation stay where it is now?

Looking at the mishappening happened last week:

• Celcius at risk. With about $28b of users' funds. It's been 11 days and still, the withdrawals have been locked.
• StETH-ETH pair: Celcius bought a ton of stETH and sold it all which created an imbalance between the pair.
• 3AC got liquidated: Rumours that some of the 3ac wallets got liquidated and founders ghosted everyone.

We are still in a risky state with Nasdaq down more than 25% from its all-time high in Nov 2021 and Bitcoin down more than 69% from its last all-time high.

With the next Fed QT happening on 26–27th July we expect a short downfall in the prices near that date. If anything below 75bps happens then we could see a temporary uptrend in the prices.