A well-renowned economist has predicted that the Federal Reserve interest rate hikes may ultimately result in safe-haven assets such as Bitcoin and gold increasing in value.
The U.S. central bank is unleashing its economic armory to battle rampant inflation that is causing the cost of living to skyrocket. Its monetary weaponry includes increasing interest rates, which increases the cost of borrowing and encourages more saving — if there is anything left to save for the average household.
On April 18, St. Louis Federal Reserve President James Bullard said that a target of around 3.5% per year could be achievable if the central bank moves quickly to raise rates. Regarding the size of the increases needed to get there, he said ones greater than 50 basis points “is not my base case,” but didn’t rule out an increase of 75 basis points according to the WSJ.
The central banker also feels the bank should be absolved of any responsibility for the economy, adding “I don’t think you can blame a recession on the Fed.”
The current interest rate is 0.5% following the first increase in three years of 0.25% last month. A 50 basis-point increase is possible at the Fed’s May 3-4 meeting according to chair Jerome Powell.
Safe haven asset demand
The long-term target has been 2% but an accelerated push to 3% or more could have dire consequences according to economists.
President of Queens College, Cambridge University, and economic advisor Mohamed El-Erian said that the Federal Reserve may be forced to change its target by recognizing that it is too late and cannot reach it causing credibility to be threatened.
Speaking on CNBC’s “Squawk Box” on April 18, he added that by pushing the rates too hard the Fed may push the economy not just into a short-term recession but into a longer-term recession. When asked by the host, what happens to gold and crypto if that is the case, he responded:
“They both go higher.”
Gold and Bitcoin are generally both considered to be stores of value, or safe haven, assets. Demand increases when there is an economic downturn, and with 8.5% inflation in the United States, that is not looking likely to change in the short term.
Gold prices are currently near their peak at $1,974/oz after gaining 8% so far this year. Bitcoin on the other hand has been in retreat for most of this year, falling 12% since Jan. 1.