High interest rates were the appropriate response to the inflation that was already present. Rising official interest rates are disinflationary, or deflationary.
Most people fail to make the distinction between the Fed-maintained interest rate and the floating market rates. When the Fed funds go up, it applies downward pressure on market-floating longer-term rates, and on inflation. It supports the value of the currency, reduces money supply, and is probably bad for US$ gold.
Falling Fed funds, or more importantly, absolute Fed funds held artificially low, increases money supply, debases currency, is inflationary, and definitely good for US$ gold.
We have been in the second scenario for forever now, and the end of it would be bad for gold. Of course, a return to market-equilibrium short rates for Fed funds would mean a deflationary collapse - a politically impossible alternative. It will not happen.
However, I believe the Fed will play a game of chicken with the markets, permitting it to experience yet another deflationary scare just long enough to shore up the currency. Then it will fire off the last couple rounds on Fed funds, and it will be basically out of ammunition.
BC |
