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July 3, 2022

From Birch Gold Group

The best time to buy gold is before a crisis.

Since the Fed can’t rely on Covid as an excuse to explain away its inflation tomfoolery, now Chairman Jerome Powell actually has to come up with a real solution.

And that solution must work, since the Fed is entrusted with keeping inflation and rates under control. Everyday Americans’ lives hang in the balance.

So, just how big an inflation “tidal wave” does Powell have to stop?

Officially, the latest inflation report came in at 7.9% in February 2022 (it’s probably accelerating even faster now). You can see how much faster inflation is rising compared to the last two decades of economic activity on the chart below (and it isn’t pretty):

In efforts to slow the rapidly accelerating inflation, Federal Reserve Chairman Powell and the board recently agreed on a .25 – .50 federal fund rate hike (from near-zero).

That was on March 16th, at the most recent FOMC meeting. But what about the rest of this year? How far is the Fed willing to go to (try and) bring inflation under control?

Pretty far it seems, starting with much higher rates by year’s end…

Fed rate hikes vs inflation“Fed officials see six more rate hikes in 2022”

The first quarter-point Fed rate hike is like tossing a bucket of water on a roaring fire.

It’s not even close to enough to slow an 8% inflation inferno that’s been building for over a year.

We already know the Federal Reserve doesn’t plan on stopping here.

According to The Hill, Fed officials expect to see at least six more rate hikes by year’s end. That could put interest rates in the 2% range.

But there’s quite a difference between the high and low predictions from the FOMC members, ranging from merely 1.5% to 3%.

And of course, it’s possible (though uncharacteristic) that the Fed might move faster.

Their goal, of course, is to engineer what’s called a “soft landing,” which means putting out the fire without pushing the economy into recession or crashing the stock market.

The median estimate of the year-end federal fund rate rose to 1.9 percent, which implies at least six more interest rate hikes if the Fed only increases rates in 0.25 percentage point increments. Federal Reserve Chair Jerome Powell has not ruled out moving faster on hike rates if inflation continues to spike above the bank’s annual average target of 2 percent.

“Every meeting is a live meeting and we’re going to be looking at evolving conditions,” Powell told The Hill’s reporter.

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It’s strange that only now does Powell say he’s treating every FOMC meeting as a “live meeting” where he “looks at evolving conditions.” What did he treat the meetings as before? Why wasn’t he looking at evolving conditions previously? Did the FOMC just jump on Zoom and talk about their grandkids?

Well, whatever they were doing before, now we have Powell’s promise that he’ll be alive at meetings and looking at things. And if history serves as any guide, the Fed will have to get much more aggressive by year’s end, if they’re going to have any hope of putting out the fire.

These two words mean stocks going “under the bus”

According to an Agora 5-minute Forecast, in order to “get inflation under control” Jerome Powell mentioned he would focus on the stability of consumer prices.

In fact, during an opening statement and Q&A session afterwards he mentioned the phrase “price stability” a total of 24 times. So you could say it appears he’s focused on that idea. The forecast continued, sharing Agora’s take on Powell’s priority:

Got that? Jay Powell’s priority right now is to get inflation under control. He doesn’t care about the stock market anymore – nor will he unless it goes into outright free fall. Even if the S&P 500 slides steadily into a bear market – a 20% decline from its most recent peak – he won’t reverse course.

History backs up Agora’s position (that Powell might get aggressive), if history were to repeat itself in a similar fashion. Here’s how…

In 1980-1982, while the Fed was trying to combat 14.6% inflation, it raised rates to more than 19%. Here’s how that legendary rate hike is described on BankRate:

[…] The Fed wanted to combat inflation, which soared in 1980 to its highest level on record: 14.6 percent.

As a result, the U.S. central bank did something that might seem counterintuitive for an institution that strives to maintain the most productive economy possible: It manufactured a recession to bring prices back down.

The fed funds rate began the decade at a target level of 14 percent in January 1980. By the time officials concluded a conference call on Dec. 5, 1980, they hiked the target range by 2 percentage points to 19-20 percent, its highest ever.

It would take 14 years before rates fell to 3% again (1994 according to the same article).

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But if you were to compare the early 1980’s with its 14% inflation and 20% rates, proportionally now it’s possible we could see rates shoot up over 10% fairly quickly with a 7.9% inflation rate to tackle.

We’ll have to wait and see if Powell gets as aggressive as the Federal Reserve did in the 1980s, of course. It does appear, however, that Powell will have to get “more” aggressive, and possibly “throw the stock market under the bus,” as Agora alluded to.

We might talk more about this “aggressive 1980s Fed playbook” next week, so long as the market doesn’t go sideways in the meantime.

But one reliable, closely-watched indicator is signaling a recession is in the cards, and the market is likely to suffer…

Yield curve already flattening, likely inverting soon

Take a look at the chart below, paying special attention to the circled parts…

This is a chart of current yields on various durations of Treasury bonds, from 1-30 years. Generally speaking, when we’re enjoying economic good times, the line goes up. Treasury bonds (like CDs) offer higher interest rates over longer durations. Quite reasonably, you expect a significantly higher interest rate in exchange for locking your money up for 30 decades rather than just a couple of years.

On the other hand, when longer term Treasury bonds are start paying less than shorter-term bonds, that’s a danger sign. That means investors are concerned, as Investopedia puts it, that “the probability of the economy contracting in the future is high.”

Right now, the curve 3 and 7-year Treasury bonds is flat – and the yield between 7 and 10-year yields is negative. The more reliable recession indicator, an inversion of the 2 and 10-year yields, is 20 bps (0.2%) away. A recession would put Powell under more pressure to “save the economy.”

But according to Wolf Richter, the Fed’s balance sheet is getting in the way, and they aren’t moving fast enough to even start getting things under control:

The weight of the Fed’s gargantuan balance sheet is pushing down on long-term yields that the Fed spent years repressing with trillions of dollars of QE since 2008, and most radically since March 2020. QE has ended, but the weight is still there, the $5.76 trillion in Treasury securities and the $2.73 trillion in MBS [mortgage-backed securities], for a combined $8.5 trillion in securities. The Fed has taken $8.5 trillion in supply of bonds off the market, and the yield curve reflects that.

By Richter’s logic, the yield curve isn’t exactly waving a recession flag – instead, it’s merely indicating that, without the Fed’s thumb on the scale, this is what interest rates would’ve looked like all along.

A lot of analysts are concerned the reliable yield curve indicator might’ve been flashing yellow (and red) lights for some time now, but the Fed’s purchases effectively smothered these warnings. There’s just no way to know how close the next recession could be. And there’s no way to know with certainty how the Fed will respond. If Powell’s really content to throw markets under the bus, the rate hikes will keep coming, meaning that recession will be longer and harder than otherwise.

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Or if Powell capitulates and turns on the money-printer, we might see a shorter recession – which we’d all pay for, because prices would keep rising…

While Powell’s Fed tries to tiptoe their way back to economic rationality, it might be a good idea to make sure your savings are prepared for either outcome.

Keeping yourself sane in a crazy world

If you don’t have a solid retirement plan, now is the time to consider making one. If you have a plan, now is the time to re-examine it. Make sure you’re positioned for a potential “earthquake” of a recession, should one occur.

That includes looking at how well your savings are diversified, before economic upheavals begin. Is your risk profile suitable for your goals? Do you have an appropriate amount of inflation-resistant investments to preserve your buying power?

During times like these, prudent savers consider physical gold and silver. They know how gold performs over time and the benefits of a well-diversified savings plan. After the earthquake begins, well, that’s when the less-prudent flock to safe-haven investments – at the worst possible time, because soaring demand pushes prices up. And remember, physical gold and silver are finite assets. No one can just print more of them to keep up with demand.

As Adam Trexler reminds us,

The best time to buy gold is before a crisis.

Wise words. The prudent will heed them.

2022, Featured, fed, inflation, interest rate hike, yield curve

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Nathan Rosevear

Nathan offers insights and reviews around the highest rated precious metal IRA specialists. He is an investor in gold and silver industry.
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