One Factor That Could Derail The Fed Tightening Path - Axel Merk
(Kitco News) - October’s equity correction, the biggest drop since the 2008 financial crisis, wasn’t enough to derail the Federal Reserve’s plan to gradually raise interest rates.
As expected, the Federal Reserve left interest rates unchanged following Thursday’s monetary policy meeting; however, many economists noted that the central bank did not mention at all October’s equity market selloff.
Axel Merk, president and chief investment officer at Merk Investments
In an interview with Kitco News ahead of the monetary policy decision, Axel Merk, president and chief investment officer at Merk Investments said that the scenario that would force the U.S. central bank off its gradual tightening path would be unwanted tightening in the U.S credit market.
However, he added that he doesn’t see that scenario happening any time soon as the U.S. economy still has enough momentum for at least another year. Because of the healthy economy Merk said the Federal Reserve will keep raising interest rate until it is too late.
“The Federal Reserve will continue to tighten into what will ultimately be a slowing economy,” he said.
Although interest rates will inevitably move higher, Merk said that investors shouldn’t completely ignore gold. He explained that the yellow metal will continue to be an attractive asset as higher interest rates lead to higher volatility and a repricing of risk assets.
“As interest rates move higher, volatility is bound to move higher,” he said. “It’s part of the process as we move to the late stage of this economic cycle.”
Another factor that will help gold, mitigating the impact of higher rates, are rising inflation pressures, Merk said. Although the Fed is not concerned with inflation, noting that long-term expectations are stable, Merk said that there are signs that price pressures are creeping higher.
“Inflation will certainly move higher because the Fed is in no rush to raise interest rates,” he said. “But once inflation picks up the Fed will have to raise interest rate faster, ending the current economic expansion. Inflation isn’t a problem until it becomes one.”
Although Merk doesn’t see the U.S. falling into a recession anytime soon and that the economy is strong enough to mitigate growing credit risks in emerging markets and other economic threats, he added that now is the time investors pay more attention to defensive assets like gold.
He noted it is inevitable that credit markets tighten as the Fed raises rates.
“Is now the time to be 100% in cash or gold? Probably not, but the time you want to diversify is when things look good. When things turn bad it is a little too late,” he said. “You have to find the strategy that works for you. You don’t want to hope that things are going to work out.”