(Bloomberg) -- Scott Minerd, Guggenheim Capital CIO, said Monday that the Federal Reserve would be wise to focus on reducing the supply of money instead of raising short term rates as the central bank seeks to tame the highest inflation in decades.

“What amazes me is that the Fed would even consider an attempt to raise rates and reduce the balance sheet simultaneously given how badly the last episode of balance sheet reduction played out in the markets while the Fed raised rates in 2018,” he wrote in a research note, warning about the dangers of any kind of a “shock and awe” campaign.

“An unexpected shock is not going to immediately flow through to inflation, but it will immediately impact already overvalued financial asset prices and undermine confidence and destabilize the economy,” the chief investment officer of Guggenheim Investments said.

Minerd, who last year argued that inflation would be transitory, said that the elevated price increases could now be a “resilient and sustainable feature of the post-pandemic recovery.”

Key Quotes

  • “Clearly the markets have become a speculator’s paradise. Meme stocks, CCC bonds, art, houses, almost anything that can be named has skyrocketed.”


  • “The surge in prices—first written off as transient due to supply chain and other pandemic dislocations—now may prove to be a resilient and sustainable feature of the post-pandemic recovery.”


  • “Any program to raise rates will require the Fed to raise the rate of interest paid on RRP operations by the amount of the increase in the overnight target rate.”


  • “In essence, the Fed will establish an artificial rate which is not set by market forces. Without market forces, the Fed will have no ability to recognize what the true demand for money would be if interest rates could freely float and thereby create a signaling mechanism to indicate the true equilibrium rate of interest.”


  • “Market pundits advocating a “shock and awe” policy of a 50 basis point increase in rates, or former Fed officials speculating that a 4 percent overnight rate could be necessary to contain inflation, reflects a degree of hubris which could do even more harm to the financial markets and the economy.”


  • “By abandoning the policy of set ranges for pegging short-term rates, the Fed could allow market forces to determine the appropriate overnight rate while monitoring inflation and adjusting the balance sheet to determine the appropriate level of money supply.”


Read More: Rates Traders Signal Doubts on Fed Riding to Rescue for Equities; Some 70% of Cryptocurrencies ‘Garbage,’ Guggenheim’s Minerd Says

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