He expects the US Federal Reserve to remain on hold as policymakers assess whether inflation expectations become meaningfully unanchored.
This is an edited transcript of the interview.Q: What’s your overall assessment of the situation now, with the war continuing for nearly 12-13 weeks and little progress toward resolution?A: I think the China visit was an important event because President Donald Trump was essentially saying he wanted to end this without “bombing the hell out of them.” That was the operative statement. He was prepared to bring this to an end one way or another, though he preferred not to use military force.
I think that was the message delivered to President Xi Jinping. And let’s face it, President Xi could open up the Strait with one phone call. Iran is effectively a client state of China. Iran sells oil mainly to China, and China is essentially its only customer.
In many ways, President Xi could end the situation with one phone call, but it is also in China’s interest to see the United States struggle and demonstrate that the US cannot open the strait despite its military strength.
I think the discussion between President Trump and President Xi was a back-and-forth. President Trump was saying that military action could resume and that once Iranian facilities are bombed, China would not get any oil.
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I suspect that after Donald Trump left, and now with Vladimir Putin, President of Russia, China may have decided to place a phone call, perhaps indirectly through Middle Eastern nations, telling Iran to negotiate seriously. That could make markets more optimistic if Iran becomes serious about negotiations.But with Putin on the scene, there is another dynamic at play. Putin may be telling China that Russia can supply all the energy China needs, reducing dependence on the Middle East and Iran.
I think the pressure is now on the rest of Asia — India, South Korea and Japan. What will these countries do if there is no peace and the strait remains blocked? Pressure may have to come from the rest of the Pacific Rim to China, saying that if China wants future trade partnerships, this situation has to end quickly.
Q: How different will the new Fed chair be, and what could it mean for gold and equities?
A: The key question for Governor Kevin Warsh and the incoming Fed chair is whether inflation becomes a longer-term process that permanently anchors higher inflation expectations in the market.
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So far, long-term inflation expectations have risen only marginally, by about a quarter point, and have largely flattened out. The jury is still out on whether the energy shortage situation will persist long enough to require a significant monetary policy response.
That puts the Fed in an awkward position because it cannot implement the strategy I have discussed before — lowering rates while rapidly shrinking the balance sheet.
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The argument for aggressive policy action will not be effective if actual inflation does not stabilise or move lower. So, for investors and monetary policy, I think it will be more of the same — largely staying on hold.
I think all this talk about a rate hike is ridiculous unless inflation expectations become unanchored and rise by half a percentage point or more in the long-term five-year and 10-year forward expectations. Until then, markets should not take the possibility of a rate hike too seriously.
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