A highly esteemed economist has opined that if the Federal Reserve should increase interest rates, inflation-proof assets such as cryptos and Gold will increase in value. As the US continues to battle with growing inflation and the rising cost of living, its central bank is making every effort to combat this huge problem. Hence, the Fed believes that increasing interest rates is its best option to combat this rising inflation rate.
Consequences Of A Rise In Inflation Rates
However, increasing interest rates will likely lead to increased borrowing costs with almost nothing to save even though it encourages saving. On Monday, St. Louis Fed chief, Jimmy Bullard, stated that if the apex bank can increase rates too quickly, a target of 3.5% can be achieved before the year is over. Bullard made his opinion known during a recent interview with the Wall Street Journal.
When he was asked about the point basis required to achieve this rate, he said: “at least 50 basis points.” He added, “We shouldn’t rule out the 75 basis points.” Bullard further said, “no one or entity should be apex bank for the economy’s predicament. It’s not the Fed’s fault that there is a recession.”
After a first-rate increase in three years last month, the current rate is 0.5%. Fed chair Jerry Powell has hinted that a 50-basis point rise is likely. The Fed would make a final decision on the rate increase at its next meeting, which is scheduled for early next month.
Dangerous Consequences
Most economic experts agree that there could be dire consequences should the Fed hasten the push towards a 3% inflation rate even though the long-term target remains 2%. An economic advisor and professor of economics at the Cambridge University, Mohamed El-Erian, opined that the Fed should modify its goal. “the Fed needs to recognize that it’s a little too late trying to force a rate increase. Otherwise, it can threaten its credibility more than it has done till now.”
El-Erian, who appeared on CNBC’s Squawk Box interview on Monday, further said, “if the Fed pushes too hard, it might throw the economy into a long-term recession more than expected.” Then, the advisor added that “crypto and gold will go higher if the Fed keeps pushing higher.”
Investing In Inflation-Proof Assets
Many investors consider Gold and cryptos (mainly BTC) inflation-proof assets. Consequently, as the economy is performing poorly, the demand for these inflation-proof assets increases; this is what’s happening in the country, with inflation at more than 8% as of this writing. More importantly, there are no indications that this inflation rate will reduce in the near term.
Gold’s price has also been rising since the start of the year. It has increased by 8.5% and currently trades at about $1,975 per ounce. Conversely, BTC (and the broader crypto market) has been performing poorly since the start of the year, losing 12.5% since 2022.
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