The Federal Reserve is caught in a difficult situation of having to raise rates without causing another recession, said best-selling author Jim Rickards.
Unlike previous monetary cycles, the Fed is trying to raise rates in anticipation of a possible recession, even while the economy is not showing signs of overheating.
"The Fed is racing to get rates up to three and a half, four percent, wherever they can, before the next recession, even though the economy is weak. Normally, you would never raise rates in an economy that's as weak as we are right now but they're doing it anyway, because they're building up some capacity to cut rates in the next recession," Rickards told Kitco News.
Contrary to popular belief, the Fed's actions are reactionary to the economy, not prescriptive, and so is behind the curve on macroeconomic trends.
"The Fed never leads the economy. This notion that the Fed does things and the economy follows is not true. The Fed follows the economy, so they'll start out with coming out of a recession with very low rates and then unemployment will go down and inflation will tick up, capacity utilization will tick up, etc. and then the Fed watches and watches," he said.
Rickards said the last administration is to blame, as the Fed should have raised rates a little bit back in 2009, and not wait until 2015.
He added that the current Fed remains "patient" but may remove that word and change their dovish stance should the economy show more signs of growth.
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This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.