Make Kitco Your Homepage

Should the Fed increase rates beyond 9%? Gold or Bitcoin standard won't control inflation - John Cochrane

Kitco News

(Kitco News) - On Wednesday, the Federal Reserve increased its key rate by 75 bps. Markets reacted positively to this, sending the S&P 500 up by 2.6 percent.

Markets clearly interpreted the Fed rate hike as dovish, said John Cochrane, Senior Fellow at the Hoover Institution and Professor of Economics at Stanford University.

"The markets seem to think we've got maybe one or two more [rate hikes], and then we're done," he explained. "Good luck to them. I think the Fed is going to keep raising interesting rates as long as inflation stays high."

Cochrane spoke with David Lin, Anchor and Producer at Kitco News.

What the Fed needs to do

The "consensus view," said Cochrane, is that the Fed needs rates to rise "substantially above inflation," so that price levels can come down.

"That means, right now with 9 percent inflation, economists are talking about 10, 11, or 12 percent interest rates to bring [prices] down," he clarified. "I think the Fed and markets are counting on a lot of inflation going away on its own without interest rates having to go quite that high."

He said that the Fed is worried about causing a "massive recession" through large rate hikes, and that there is political pressure on the Fed to keep rates low.

However, he added that there is a "chance" that inflation would "slow down on its own" if the Fed does nothing. This would be contingent on no "bad shocks."

"The main thing I worry about is the risk of new shocks," he said. "The war could worse. China could invade Taiwan. A new pandemic could come out. The Middle East could blow up. Iran seems to think it's going to have a nuclear bomb… So something bad is going to happen. I don't know what it is or where it's going to be."

Growth stocks will make a quick comeback before crashing again - Chris Vermeuelen

Controlling inflation

When asked whether the gold standard could control inflation, Cochrane responded, "Sorry, no… Under the gold standard, there was a lot of inflation and deflation. 10 or 20 percent ups and downs of inflation and deflation, but every inflation was then matched by a deflation. I'm sorry, we're not going back to gold."

He said in particular that the Bretton Woods system, from 1945 until 1971, was "awful," restricting international capital movements and stifling trade.

Some writers, like Saifedean Ammous, while acknowledging the limits of a gold standard, advocate a Bitcoin standard instead.

"That's a terrible idea," said Cochrane, in response to a Bitcoin standard. "In terms of financial technology, Bitcoin is an attempt to revive gold, something intrinsically worthless that people only hold onto because it's rare… Bitcoin is also very poor for making transactions itself, since it's so computationally intensive."

Cochrane's solution to inflation was a better fiscal and monetary regime.

"The best answer is our governments should start running sober fiscal and monetary policies, and pay more attention to keep inflation under control," he explained. "We had a pretty good system going, of low inflation and well-run countries. We need to get back to that, rather than trying to invent something totally new."

To find out Cochrane's views on a recession and Biden's energy policy, watch the above video.

Follow David Lin on Twitter: @davidlin_TV

Follow Kitco News on Twitter: @KitcoNewsNOW

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.