Well… The US Fed has taken the plunge and has decided to take the fight against inflation with its recent 0.75% hike in interest rates. In case you missed it, inflation is above 8% in the US. Wow!
How things can change so quickly. But I fear that, as always, policymakers have shown that they will always (albeit understandably) be slow to make the tough decisions and fast to take the easy ones.
For most of 2021, the Federal Reserve Chair, Jerome Powell said that inflation would be transitory. Even as inflation rose above 6%, the Fed kept interest rates near zero.
As those who have followed my blogs over the last 2 years will know, I have been worried about the toxic combination of easy money and inflation for quite a while. If you missed it, you can read them here 2021 Predictions; Will Gold Fall Further. And in the longer run, I believe high inflation is here to stay especially if we are to fight against climate change – Climate change, the Economy and Gold.
Whether I am right or wrong about inflation in the long term, time will tell. But what we do know for certain is that the Fed is now aggressively engaged with its fight against inflation with its preferred weapon of choice – interest rates.
I wrote at the end of 2021 about the adverse impact of rising interest rates in the US on the Ringgit. An appreciating dollar driven by investors moving their funds to the higher interests in the US away from emerging markets resulting in the weakening of our currencies.
To be clear, this is a problem that affects most emerging economies – and not just, Malaysia – as you can see from the chart below.
The next phase for us will be up to our policymakers – do they live with a steadily weakening currency and an outflow of foreign investment capital or do they try to defend the currency with their own interest hikes?
In the fullness of time, inflation will be brought under control – the question is how long and at what cost?
The last time that the Fed fought inflation was at the start of the 80s and it took them two years to get it under control (and a total of 3 and a half years for inflation to dip below 8%).
Paul Volcker was the then chairman of the Fed and he pushed short-term interest rates to nearly 20% sending unemployment soaring to nearly 11%, which triggered one of the worst recessions ever in the US. If this current war against inflation in the US plays out in a similar vein, our policymakers will not have any easy options.
Yes. Good times will re-emerge at some point. Most things economic and financial are cyclical. Yes. There will be investments that will thrive in a recessionary environment. But if you are:
1) unsure / not knowledgeable enough to pick the winners, or
2) heavily invested in ringgit-denominated savings,
I believe that gold remains the clear, easy and safe choice to weather the brewing storm.
Based on its performance over the last 12 months, it has fared better than either the KLCI or Bitcoin – there is every reason to suggest that it will continue to be a sound investment choice for Malaysians as our policymakers navigate the country through an inflationary world.