- Despite the attention to the U.S. Federal Reserve’s hawkishness, it’s entirely possible that the central bank could blink first when it comes to tightening.
- Legendary investor Rick Rule believes that the current constitution of the Fed does not have the stomach to repeat the Volcker-era of massive rate hikes to as high as 20%.
Although the U.S .Federal Reserve’s hawkish bent is a well-worn story, there are some who believe that central bank policymakers will eventually be forced to buckle.
In an interview with Stansberry Research, Rick Rule, former president and CEO of investment fund Sprott U.S. Holdings, suggests that the Fed will “chicken out” and discontinue its aggressive policy tightening.
Additionally, Rule believes that the Fed won’t have the same fortitude to combat inflation as compared to the past.
In the 1970s, then U.S. Federal Reserve Chairman Paul Volker upped interest rates to as high as 20% at one stage, to combat rampant inflation that had hit a high of 14%.
With U.S. headline inflation at 8.6%, the current Fed would need to raise rates to 12.2% to achieve the equivalent of the Volcker era, an unthinkable measure in an economy that is rapidly slowing.
Rule however believes that inflation won’t fundamentally be quelled until rates do “amazing damage to various balance sheets” and there’s sufficient empirical evidence to back his view.
In 2018, the Fed backed down from raising rates as markets responded almost instantaneously to the prospect of tightening.
And there are signs that June’s inflation print is likely to be more moderate, compared with May’s.
Long-term Treasuries are pricing in the annual rate of inflation at around 2.36%, far from the doomsday predictions of some inflation bulls.
Rule has hunkered suggests three main asset classes to prepare for this next period, precious metals, price inelastic producers and surprisingly, cash.
According to Rule, while the value of cash may be eroded because of inflation, it affords the advantage of liquidity to take advantage of opportunities.