As we promised last week, we’re going to explain how the Fed’s response to our economy is going to complicate economic matters and make things worse, however we have to begin with a piece of breaking news that came in yesterday.
The numbers just came out and inflation rose by a staggering 7% this past December.
That is the largest inflation rise since 1982.
The rise in 1982 was after a disastrous four years by Jimmy Carter. The Biden administration seems to be wrecking the economy much faster. This raise in the Personal Consumer Expenditure Index (CPI), which is the Fed’s favorite gauge of inflation, is three and a half times higher than the central bank’s 2% inflation target.
Last week, before the 7% number was announced, Minneapolis Fed President Neel Kashkari admitted that Inflation had risen higher and lasted longer than he expected. He said this when the reported number was 5.7%, so you can only imagine what he feels now.
A prevalent risk in the face of consistent and recent inflation spikes is that consumers start to expect higher inflation. This leads to consumer trepidation around spending which economists believe can kick off a dangerous upward spiral, one that Kashkari said would be costly to the economy.
Given the new reality of persistent inflation, Kashkari said the U.S. economy faces two divergent paths that are both quite risky.
Option 1: Raise interest rates high enough out fight upward inflation
Sparse inflation can cause the economy to continuously flirt with recession and limits the Fed’s ability to boost growth. This risk might lead the Fed to hold off on aggressive rate hikes.
Being that this is an election year, the Fed will not allow themselves to be viewed as swaying or interfering with the election process, even if that means not doing what needs to be done. Raising interest rates would ultimately hurt the democrats as it would have happened to combat inflation as a result of poor governing and policies. However, the Fed is not going to do anything drastic in an election year, which means they won’t raise the rates high enough or as frequently as is needed.
We saw the Treasury Yields rocket up based on the recent numbers for the manufacturing index. This pulls money from the Equity market as investors begin to find a return that offers safety. The past few years have made a decent return hard to find outside of Metals and the Equity market.
So to fight the spiraling inflation interest rates would have to move significantly and quickly. This will devastate the Equities market. While it would be an amazing boon for the Precious Metals market it will come at a cost to the economy and the value of the dollar.
Option 2: Do nothing and let another recession happen
The other option of course is another recession. The Fed won’t raise rates high enough or as often as is needed so ultimately they have no tools left to fight off a recession.
Rates can’t go lower and they are already adding dollars to the economy. More money won’t help at this point, our markets and financial institutions have been on the receiving end of near Limitless Quantitative Easing (QE). QE simply put is when central banks purchase government bonds or other financial assets in order to inject money into the economy. This however is usually done when Inflation is extremely low or even negative.
Tapering QE now to only start again in a couple of months would be useless. As Fed Chairman Kashkari said “It is going to be a tricky, tricky task to navigate these two possible different outcomes,”
Politically it would end the only talking point the President and the Democrats have in their favor this election cycle. The equities market would give back all its gains from before the election of President Trump.
This would certainly seal the fate of the current Democrat advantage. With the Senate and House in republican control we would see a lame duck President with 2 + years to serve. There are difficult and painful steps the Fed could take as we’ve outlined above, however politics again reigns supreme.
We are facing an economic disaster. If the Republicans take back the house and/or Senate, we have two years of gridlock ahead. The Democrats will not work with the Republicans to institute the policy changes we need to get this economy turned around. Instead, they’ll do nothing and the economy will end up in a free fall. If the Democrats maintain control, we can expect more of what we see now.
There is a solution, leverage Precious Metals to protect yourself from the economy. If you’ve been reading our newsletters, you know now that gold hedges against inflation and is inversely proportional to the dollar. That means as the dollar loses value, gold gains value. As inflation increases, gold becomes more valuable.
IF you haven’t already contacted us do so now and we can help you with a plan to keep your retirement and savings safe. Call us at 866 473 6204. Time is important here, the faster you can get protected, the less of your retirement is eroded away by inflation.