Inflation fears already roiled the market this week with the Nasdaq falling nearly 2%, but one hedge fund founder is sounding the alarm over a potential 20% collapse that could be sparked by the Federal Reserve signaling an end to accommodative pandemic-era monetary policy later this year.

Satori Fund founder Dan Niles recently told Yahoo Finance that this week's hotter-than-anticipated inflation data coupled with other central banks around the world already coming off their easy money policies will likely corner the Fed into tapering its accommodative policies sooner than expected.

"If you’ve got food prices, energy prices, shelter prices moving up as rapidly as they are, the Fed’s not going to have any choice," he said, predicting that the Fed could signal the beginning of a move to wind down its monthly $120 billion a month pace of asset purchases by this summer. "They can say what they want, but this reminds me to some degree of them saying back in 2007 that the subprime crisis was well contained. Obviously it wasn’t."

For their part, Fed officials have remained adamant that a rise in inflation is to be expected as a transitory reality of the economy reopening from the pandemic lockdown. The latest print from the Bureau of Labor Statistics out this week, however, may have spooked investors when it showed consumer prices for the month of April rose at their fastest annual pace since 2008. That inflation metric, which is different than the Fed's preferred Personal Consumption Expenditures (PCE) index, jumped to a 4.2% rise over the last 12 months. The Fed has already signaled it would be comfortable staying accommodative even if inflation in the recovery shoots past 2% as measured by its preferred metric.

But as Niles points out, other economies around the world have already signaled their intent to shift away from accommodative monetary policies put in place during the pandemic. The Bank of Canada already began its tapering and the Bank of England became the second among the G7 nations to talk about it — a phenomenon, Niles said, that could push the Fed into acting quicker. Elsewhere countries like Russia and Brazil have already seen a rise in interest rates.

"This process has already started in other countries around the globe and I think the U.S. is just going to be lagging that and playing catch up which is why it’s so disruptive," he explained. "None of this would honestly matter if valuations were low but they’re not, they’re at record highs."

As Niles charted on his blog, the market's 10-year break-even inflation expectations are at their highest level since 2013. Inflation concerns as measured by the 10-year Treasury yield have been held artificially low, he said, by extension of the Fed's bond purchases. But talks of tapering that monthly $120 billion purchase program could change come summer, when Niles predicts the Fed will throw in the towel on its accommodative signaling. His thesis remains that a 10% to 20% correction would ensue, hitting unprofitable growth names the hardest as has been the case so far in 2021.

"If after 13 years of the Fed giving you easy money, they now all of a sudden start to pull that back, you’re going to have to rethink where you’re invested to get a better risk-versus-reward trade," he said, "and lower valuation names that make lots of money — that’s where you want to be."

As a hedge fund manager, Niles revealed a mix of long and short positions, but explained that larger tech companies that have shown earnings strength like Google and Facebook might fare better than unprofitable competitors who can't flex the same strength in a rising rate environment. Elsewhere, the energy sector and financial names like JPMorgan Chase (JPM) remain some of his favorite value plays moving forward.

Zack Guzman is an anchor for Yahoo Finance Live as well as a senior writer covering entrepreneurship, crypto, cannabis, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.

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