TIP137: Jim Rickards - Interest Rates and Central Bankers

Episode Summary

Executive Summary: James Rickards argues the Fed is on a predictable path to keep hiking rates quarterly until it reaches about 3.25%, not because the economy is strong but because it is trying to rebuild policy room before the next downturn. He says long-term yields should keep falling, deflationary forces dominate, and the U.S. resembles Japan in a prolonged low-growth, low-rate trap.

Main Topics: Fed policy as a clockwork hiking cycle (Priority: 5/5): Rickards says the Fed will likely raise rates every quarter—March, June, September, December—through mid-2019 unless clear pause conditions emerge. Deflation versus inflation tug of war (Priority: 5/5): He frames the macro environment as a balance between structural deflationary forces and monetary inflationary forces, with neither side fully winning. Why U.S. rates can keep falling (Priority: 4/5): Rickards agrees with the view that 10-year Treasury yields can move toward 1% because U.S. yields remain high relative to other major economies with negative or near-negative rates. Japanization of the U.S. economy (Priority: 5/5): He argues Bernanke and Yellen repeated Japan’s policy mistakes, leaving the U.S. in a multi-decade depression-like state of below-trend growth. How the Fed decides when to pause (Priority: 4/5): He outlines specific triggers that could stop hikes: weak jobs data, disinflation, recession, or a disorderly stock-market decline. Trading and portfolio implications (Priority: 4/5): Rickards recommends trend-following, nimble positioning, and taking profits quickly because Fed-driven reversals can erase gains fast.

Key Arguments: The Fed is tightening into weakness for the first time since 1937, so hikes are not evidence of economic strength but of policy catch-up. Long-term Treasury yields in the U.S. can fall much further, potentially toward 1%, because global bond markets already show that negative yields are possible in major economies. Deflationary forces—demographics, debt deleveraging, technology, and post-crisis caution—continue to suppress inflation. QE and zero rates did not restore trend growth; instead, they left the U.S. stuck in a Japan-like low-growth regime. Negative interest rates can backfire by making households save more, not spend more, because people protect long-term goals like retirement and education. The Fed wants to raise rates to around 3.25% so it can cut by 300 basis points in the next recession, but doing so may itself trigger that recession. Market participants misread causality: the Fed follows the economy, not vice versa, but Wall Street often treats hikes as proof of strength. A practical approach is to trade the Fed’s likely response function, but remain flexible because policy can flip quickly when pause conditions appear.

Data Points: 10-year U.S. Treasury yield: about 2.2% at the time of discussion - Rickards cites this as high relative to Japan and Germany. Possible long-run 10-year Treasury yield: low 1% range - His forecast for U.S. long rates as deflation pressures persist. Fed balance sheet: $4 trillion - He uses this as part of the money-printing argument. Global money printing estimate: about $20 trillion - Rickards estimates combined central-bank liquidity creation worldwide. Global debt accumulation: $100 trillion - He says this debt sits atop monetary expansion. Expansion length: 8 years and nearing 9 years - He notes the recovery began in June 2009. Target policy rate: 3.25% - Fed wants enough room to cut in the next recession. Needed recession response: 300-400 basis points of cuts - He says that is typically required to exit a recession. Market-implied March hike probability: 28% to 30% before jumping to 90% - He describes the market repricing before the March 2017 hike. Rickards’ hike probability estimate: 75%-80% - His own estimate before the market converged. Jobs threshold for pause: below 75,000 - He says Yellen’s speeches imply this level would make the Fed pause. Inflation target: 2% - He refers to the Fed’s PCE core deflator target. Stock-market pause threshold: more than 5% disorderly decline - He says this would make the Fed pause hikes. Quarterly hike cadence: four hikes per year - March, June, September, December through mid-2019 in his baseline view. Historical reference: 1937 - He says the Fed is tightening into weakness for the first time since 1937.

Pivotal Quotes: "The Fed is tightening into weakness." — James Rickards: Core thesis on why rate hikes are policy catch-up rather than strength-driven. "We are Japan." — James Rickards: He summarizes his view that the U.S. has entered a prolonged low-growth, low-rate regime similar to Japan. "The Fed never leaves the economy ever. The Fed follows the economy." — James Rickards: He argues the market misreads causality between growth and rate hikes.

Implications: Listeners should expect continued Fed hikes unless recessionary or disinflationary signals intensify, but should not assume higher rates mean a stronger economy. For investors, the message is to stay nimble, favor trend-following, and be prepared for lower long yields and renewed Japan-like stagnation.