The Fed last week raised interest rates for the fifth time this year in a bid to rein in inflation that is running at a 40-year high of over 8%. The central bank raised the federal funds rate, which began the year close to zero, by another 75 basis points to the 3.00 to 3.25% range, and indicated another 125 basis points could be added by the end of the year.
Fed Chairman Jerome Powell in comments after the rate hike signaled that the central bank would continue increasing rates until inflation was brought down to 2%.
"The Fed' interest rates decision is fueling the global recession, which is a foregone scenario," Shostak said. "Continuing Fed's actions will spur selloff of the global equities and bonds and will significantly depreciate local currencies of many emerging markets."
The US economy, he added, is already in recession mode for the last two quarters, marked by record inflation, skyrocketing energy prices, supply chain issues, and capital markets in turmoil.
Shostak believes that the Fed got it wrong twice.
"First, it has been late to admit the inflation and refused to adjust the rates when the economic realities demanded it most," he said. "Then it embarked on a late and very blunt series of record-high rate hikes, another form of extremes. The whole world is bearing the brunt of the Fed's short-sighted actions."
Shostak said after the Fed hiked rates to the 3.00 to 3.25% range US sovereign bonds and equities traded pretty much like emerging market papers, having lost more than $57 trillion of combined value in 2022.
"The US bond market along lost around 12% on average in 2022, an extremely high figure, considering this was supposed to be super-safe fixed income, not equity," he added.
21 September 2022, 19:22 GMT
Shostak noted that the most profound losses have taken place in the bonds with longer maturities as they are the most vulnerable to an increase in interest rates.
"For example, the $24.6 billion iShares 20+ Year Treasury Bond ETF (TLT) is down 26.4% through September 13. It is Finance 101: as the rates go up, the value of the bonds go down," he explained. "What is astonishing this time is the speed with which these bonds are loosing their valuations."
With the Fed signaling the new target rate at 4.5%, he added, it is only a one-way road now for the Treasuries. So their holders worldwide are going to book significant and unheard of portfolio losses, Shostak said, including international holders of the US debt, most notably, Japanese, Chinese and British funds.
"The 'quiet' US bond market has not seen anything like that since 1949," the investor added. "Naturally, the investors are shocked and the confidence in the US as a 'safe heaven' has been eroded and shaken once and forever."