Friday, January 29, 2016

Jim Rickards: Fed Will Raise Rates Based on Incorrect Models

In this article appearing on Kitco, Jim Rickards repeats his prediction that the US Fed will continue to raise rates awhile longer. He says they will do so in the face of a declining economy because they are using outdated and incorrect economic models. Below are some quotes from the article.

"Despite recent market volatility, the Fed is still on track to raise interest rates says bestselling author Jim Rickards.
That said, the central bank is tightening based on incorrect models and will eventually be forced to start easing again, the author of Currency Wars suggested in this latest blog post.
“Investors should expect near recessionary conditions, and continued declines in stock prices for the next 6 to 8 months,” warned Rickards."
. . . . .
Why is Rickards so convinced the Fed will need to ease again?
"The longtime financial commentator said the economic models, used by the Fed to make monetary policy decisions, are inadequate. The economic models – like the Phillips Curve, the Federal Reserve Board US macroeconomic model (FRB/US), and the non-accelerating inflation rate of unemployment (NAIRU) – are not properly reflecting inflation and employment conditions in the country, he explained.
“[I]nflation today is nowhere in sight and deflation is the greater risk. Only Yellen and a few like-minded Fed officials see inflation as a risk because they’re looking at models, not the real world,” he said."
My added comments: This Kitco article is basically a summary of a longer article Jim wrote for email subscribers to his weekly commentary. These comments are basically the same as he has made in several recent media interviews so they are not new information if you follow Jim. What I take from this is that Jim really is not expecting the kind of major crisis (worse than 2008) he has predicted to take place this year. Instead, it appears he just sees the economy moving into recession and the US Fed finally caving in to admit that by mid 2016. Even then he only expects minor adjustments from the Fed, not what you would expect to see if a huge major crisis were underway. He says the Fed will avoid high profile actions heading into the 2016 elections.
What readers can watch for: This blog is purposefully non political, but we can make observations about the political process as it relates to the economy and possible monetary system change. If we do see the kind of major crisis (worse than 2008) this year it will most likely impact the elections (as happened in 2008). Such a crisis would probably benefit the Republican candidate in the same way the 2008 crisis was helpful to President Obama. Otherwise, a relatively stable economic environment is likely to be helpful to the Democratic candidate or a least a neutral factor in the elections.

An interesting question that will not be asked during the campaign is how each candidate would react to a major crisis if we got one. Who would they blame and who would they point to for a solution to such a crisis? If no crisis unfolds in 2016, voters will have no idea how their next leader would answer this important question. if we get do get the kind of crisis Jim Rickards is predicting after this year (a crisis worse than 2008 with bank closures etc), this will be by far the most important issue the next President and Congress would have to deal with, yet no one who will vote has any idea how they would handle it.

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