In this interview, Jim Rickards discusses how the Fed will position US interest rates in response to the current economy, given the drastic effect Russian sanctions have had on commodities.
Russia, sanctions, and commodities
Earlier this week, in an interview with our Editorial Director Greg Canavan, Jim Rickards explained the geopolitical and historical antecedents of Russia’s invasion of Ukraine.
In the most recent interview, Jim turns his attention to the dislocation in the commodities markets, exacerbated by Russia’s export prominence in the agricultural and oil and gas sectors.
Russia is one of the biggest exporters of key materials like gas and crude oil, aluminium, wheat, and palladium.
The rally in commodities was highlighted by the spike in the Bloomberg Commodity Spot Index, which last week posted its largest weekly gain since its inception in 1960:
Source: The Australian Financial Review
The effects of the heavy Russia sanctions weren’t unforeseeable, however.
Jim Rickards warned that sanctions on Russia will also hurt the global interdependent economy.
With the world now feeling the consequences of rising commodity prices, it is important to consider how the US Federal Reserve will react and how its reaction could impact the wider economic outlook.
The interest rate question and why the Fed is ‘pretty clueless’
Turning to the question of interest rates, Jim prefaced his answer by noting that he thinks the Fed is ‘pretty clueless’.
The Federal Reserve is set to raise interest rates on 16 March, despite the escalating conflict in Ukraine.
Jim thinks the Fed will stick to raising rates on 16 March because it is transparent…to a fault.
Transparency sounds like a good thing, says Jim, unless your idea of transparency is to stick to what you predicted a year ago regardless of exogenous variables.
Jim thinks the Federal Reserve will have a three-part announcement:
- The Fed will announce that the taper is over (which everyone already knew), meaning they will no longer increase the base money supply with asset purchases
- The Fed will raise rates by 25 basis points, and
- The Fed will announce it will contract the money supply by selling, rather than buying, bonds.
This three-pronged announcement will amount to what Jim described as a triple form of tightening: raising rates, cutting the taper, and reducing the money supply.
In Jim’s view, the Fed’s looming decision is ‘extreme’.
As he noted, the Fed is seeking to tighten monetary policy just as the Federal Reserve Bank of Atlanta GDPNow projects US GDP first quarter growth of 0.5%.
The US economy is stalling.
A war is raging.
Supply chains are disrupted.
Commodities markets are going haywire.
And energy prices are spiking.
Yet in that world, the Fed wants to tighten monetary policy.
To find out what Jim Rickards thinks could happen as a result, watch the interview below:
Regards,
Kiryll Prakapenka,
For The Daily Reckoning Australia
