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Fed will collapse the economy and be forced to pivot

Nov 4, 2022, 12:21 p.m. GMT
This article is more than 1 year old.

Yesterday the Fed hiked rates. It wasn’t exactly a surprise. For gold and silver investors it was yet another great opportunity to remind ourselves why we invest in gold bars or buy silver coins – because central banks are predictable.

They do not have perfect economic knowledge, they do not create long-term value and they are always reacting to the consequences of their poor decisions. Of course gold and silver are in high demand right now – precious metals are one of the few remaining ways to keep out of the way of central banks decisions and to protect your wealth. 

The Federal Reserve raised the fed funds rate by a further 75 basis points to a range of 3.75% to 4.00%, as expected this week. And the statement had hints of a possible pivot – or slowing of rate increases. 

Citing the slowing of global activity and mentioning “the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and financial developments”, the Fed gave faint hope to bond and equity investors. Markets took the statement as a dovish sign and rallied. Gold rallied too, for a moment. 

But then in what one Bloomberg commentator called a ’bait and switch’….  “Like a reproving parent, the Federal Reserve chairman quickly put the kibosh on any budding euphoria his comments about monitoring the lagged effect of interest rate policy might have provoked.

Powell then went on to reiterate that “rates are going up” adding “probably more than people thought.

Moreover, after the initial surge markets sank – to finish far lower. The S&P 500 index surged 1% – then closed the day down 2.5% – its steepest drop since mid-October. 

Markets are looking for central banks to pivot to easier policy. Which we think they will do next year as economic growth weakens and unemployment surges, but we also propose that there is an additional pivot on the horizon which is far more important for our readers – that the inflation target rate itself will ‘pivot’ higher.

Please take a moment to reread our primer on inflation target rates  from May 26 – Did Central Banks arrive at their Target Inflation Rate by Mere Fluke? As economic activity wanes, house prices fall, equity markets drop and mortgage rates rise – we remind readers that the 2% rate inflation target was set by a fluke.

Central bankers are, of course, denying that they are even thinking about doubling the inflation target from 2% to 4% – but central bankers change their messaging often. Remember it was last year at this time rates were still at near zero and central banks were trying to convince the world that high inflation rates were completely ‘transitory’ and we would be back to 2% levels by now.  

A higher target inflation rate could end up being the central banker ‘get out of jail free card’. It enables central banks to pause rate hikes while inflation remains high as economic activity weakens and housing prices fall. It also benefits governments by inflating away some of the massive debt loads that have built up through years of overspending.

Additionally, this pivot could play out as a ‘temporary’ increase in the inflation target rate. Again, going back to last year, central banks were also proclaiming the message that inflation could run above target for some time since it had been below the inflation target for many years.

Some inflationary pressures have abated – supply chains are being restored for example. However, others are long-lasting new policies, such as ‘friend-shoring’ aka protectionist policies. Also, no matter the name, the resulting higher prices are a new reality.

Another source of higher inflation for years to come is the move to renewable and sustainable energy. New price hikes are coming as the technologies are developed but the commodities needed are in short supply.     

One might ask why governments would support central banks increasing the targeted rate of inflation. The simple answer: governments like to spend more than they have which has led to massive debt levels. One way to reduce these massive debt levels – higher inflation!

The only other way to reduce debt levels is financial repression and austerity. The problem with austerity is that governments choosing this route are quickly voted out of office. See our post from March 4 Central Banks Still Do “Whatever It Takes”! for more on government options on reducing massive debt levels.

Bottom line: The Fed Still Has No Idea What’s Coming Next, which was the headline to our March post after the Fed raised the fed funds rate for the first time this year.

Finally, we remind readers that no central banker can inflate five pounds of gold into ten pounds of gold. Paper currency is inflated at a pace controlled by the government. One of the best reasons to own physical metals is storing wealth outside a system which is built on debt and government promise.

If you’re keen to hear more about FOMC actions, or the wider macro-economic landscape then have a look at our YouTube Channel, GoldCore TV. This week we discussed access to rare earths and how the West’s energy supply hangs in the balance. See the conversation with Dr Stephen Leeb, here

Fed will collapse the economy and be forced to pivot

From The Trading Desk

Market Update

The much anticipated Fed meeting took place on Wednesday.

The market was expecting a 75bp rise which it got bringing rates to their highest since early 2008, raising the bank’s benchmark lending rate to 3.75%-4%. 

The market was looking for clarity from the Fed at this meeting, but it got very mixed messages. 

On the release of the rate hike announcement the fed initially said there would be smaller hikes going forward, the market reacted with stocks up, gold and silver up and DXY down.

However, in the conference call that followed the rate hike announcement Powell was more Hawkish warning that rates were likely to move up again, saying that speculation the bank might pause was ‘premature’ and that ‘we still have some ways to go’.

This caused the market to sharply reverse and give back all its earlier gains. This morning gold is back at the critical $1620 double bottom level that it needs to hold. 

What are we seeing at GoldCore? We are continuing to see a buy sell through rate at 90%, clients are taking advantage of these lower precious metal prices, cost averaging into these pullbacks, and adding to their existing allocations. It’s a game of patience for now. 

Stock Update 

Gold Brittania’s & Silver Brittania’s are available again for UK and Irish Investors. Gold Britannia’s start at 7.5% over Spot 

GoldCore have excellent stock and availability on all Gold Coins and bars. Please contact our trading desk with any questions you may have. 

Silver coins are now available for delivery or storage in Ireland and the EU with the lowest premium in the market. Starting as low as Spot plus 38% for Silver Philharmonics.

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03-11-2022 1620.65 1628.75 1441.73 1452.03 1664.41 1665.23
02-11-2022 1656.45 1649.55 1440.95 1437.91 1673.18 1670.83
01-11-2022 1652.55 1645.25 1431.60 1434.49 1663.29 1666.80
31-10-2022 1638.85 1639.00 1419.74 1425.27 1649.50 1656.87
28-10-2022 1649.25 1648.05 1430.39 1424.57 1656.01 1652.83
27-10-2022 1663.30 1659.75 1438.42 1431.04 1656.31 1656.93
26-10-2022 1670.80 1666.75 1443.24 1439.91 1666.96 1661.58
25-10-2022 1642.85 1659.25 1450.47 1443.88 1664.37 1664.89
24-10-2022 1646.35 1649.15 1455.70 1457.02 1678.12 1670.42
21-10-2022 1624.55 1643.25 1458.20 1470.05 1665.98 1677.59

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