SIMON BROWN: Chat now with Viv Govender from Rand Swiss. Viv appreciates the early morning hours. the [US Federal Reserve’s James Bullard (president and CEO of the Federal Reserve Bank of St Louis). The Fed folks are always talking and engaging. But yesterday he was giving a speech and he got quite hawkish on us. And essentially he said that tapering could potentially increase to $30 billion a month. That would then open the door to rates [being hiked] by the end of the first quarter of next year, which is very hawkish and much faster than expected.
GOVERNOR VIV: …Certainly. But I’d take that with a pinch of salt. Yes, he will be a voting member next year in the [Fed], it will therefore have an impact on decisions. But… remember Jerome Powell, who is currently in charge of the US Fed, was a person appointed by Trump. [US President Joe] Biden will likely come under pressure if we see the Fed hike rates and that obviously has the likely negative connotations of slower growth, possibly a decline in the stock market, etc. He’s probably going to be under pressure to try to change Powell for someone else or pressure Powell, even though he’s supposed to be independent, not to raise rates. I firmly believe that central banks are not really independent at the moment. They get a lot of feedback from government and society as a whole.
And I don’t think a central bank governor will try to be too aggressive about cutting all rates, even in the face of slightly higher inflation.
SIMON BROWN: So do, I mean, are you maybe thinking about the second half of next year or are you in the 2023 camp for rate hikes in the United States?
GOVERNOR VIV: I think we could have some increase next year, but I think it will be very temporary and very slow. I don’t think we’re going to be going back to normal rates anytime soon and any crisis brought on by the market down to a downturn in jobs or economic growth and so on. will likely be seen as an immediate sign to back off. I just think long term high inflation, that pain that comes from inflation takes a long time to happen and in a political environment the long term negatives are usually ignored longer than they should be. .
SIMON BROWN: Yeah. And you said central banks are not particularly independent. They almost have two masters. One is governments, presidents. The other is the market. I mean, if the market goes into a slump, we’ve certainly seen the Fed reverse rates pretty quickly.
GOVERNOR VIV: Oh yes. Certainly. I mean the reason we had rates so low for so long – I mean 2008 was 13 years ago… and yet we weren’t back to normal interest rates straight away. at that time [pre-Covid-19]. The markets had been racing for a very long time. I think it’s important [yes] inflation like I said is a crucial long term factor and any political institution has very big problems trying to tackle any long term political pain. Inflation will be a problem if it gets out of hand, you know, in five years or 10 years, when we start to worry about double-digit inflation plus. And I think that’s the problem: the guys who are in charge of these things, really don’t have any incentive to worry about the long term.
SIMON BROWN: Yeah. And then, I mean, one last quick question: Markets were hitting all-time highs then, I thought if we started seeing rate hikes early next year, it might get messy. But if [there are] no rate hike, can this market continue to operate?
GOVERNOR VIV: It could be, it could be. If we see rate hikes, remember that much of the growth is due to truly speculative results. I mean, look at something like Tesla for example. Much of its performance is based on future growth. If you have high inflation rates, as an economist will tell you, the discount rate goes up, but is any future growth discounted more? And that means you are going to see stock prices under pressure. So we could see the tech sector, especially the more speculative things, come under enormous pressure because of it.
SIMON BROWN: Absoutely. So we’ll wait and see, we’ll keep an eye on this. But Viv Govender says he’s not convinced about these early rate hikes. Viv Govender at Rand Swiss, appreciates the time.