Imagine waking up in Chicago on some cold wintry morning, putting on your heavy overcoat – only to have someone tell you that the coat will not keep your any warmer. After all, who in Hawaii ever wears a heavy overcoat? Now, I know this tale sounds absolutely stupid but check out the latest from John Tamny:
The Federal Reserve announced a quarter-point rise in the federal funds rate on Tuesday and futures markets have priced in another quarter-point hike for May, which would bring the key overnight interest rate to 5 percent. The positive or negative economic impact of continued rate hikes aside, the price of gold is what many Fed-watchers will study to gauge the effect of the rate increases. Yet, perhaps surprisingly, nominal fed funds rate increases have rarely succeeded in bringing down the price of gold. While this phenomenon in part can be explained by the fact that rate hikes have often occurred amidst inflationary episodes, economist Alan Reynolds has made the point that the “Fed should remember that countries with sustained low inflation never have high interest rates, so high interest rates cannot be the route to low inflation.”
I’m not sure if Mr. Reynolds was ever this guilty of confusing cause and effect. And I’m certainly not happy with tighter monetary policy given my view is that we are still below full employment. Then again – I do not equate gold prices with the general rate of inflation.