International Forecaster Weekly

FED IS FULL SPEED AHEAD Gold & Silver Off to a Good Start

The economy doesn’t want for problems—there are plenty of them, both at home and stemming from rising geopolitical volatility in eastern Europe.

But as Neil Irwin writes, wherever the movers and shakers of the Federal Reserve look right now, “they're seeing flashing green lights that the world wants them to get moving on raising interest rates.”

Yes, the Fed acts independently based on its best analysis of economic data—in theory anyway. 

But other factors shape the tone and outcomes of internal debates, too—like discussions by outside economic thinkers and financial market reactions to potential and actual Fed moves.

Right now, Irwin believes those reactions are almost uniformly pointing toward more aggressive action to try to rein in high inflation.

In fact, Fed future traders say another rate hike by the Fed’s May meeting is a done deal—38.4% see a hike of 50-75 basis points (0.5%-0.75%), while 61.6% see a hike of 75-100 basis points (0.75%-1.0%)

Guest Writer | March 23, 2022

By Dave Allen for Discount Gold & Silver

The economy doesn’t want for problems—there are plenty of them, both at home and stemming from rising geopolitical volatility in eastern Europe.

But as Neil Irwin writes, wherever the movers and shakers of the Federal Reserve look right now, “they're seeing flashing green lights that the world wants them to get moving on raising interest rates.”

Yes, the Fed acts independently based on its best analysis of economic data—in theory anyway. 

But other factors shape the tone and outcomes of internal debates, too—like discussions by outside economic thinkers and financial market reactions to potential and actual Fed moves.

Right now, Irwin believes those reactions are almost uniformly pointing toward more aggressive action to try to rein in high inflation.

In fact, Fed future traders say another rate hike by the Fed’s May meeting is a done deal—38.4% see a hike of 50-75 basis points (0.5%-0.75%), while 61.6% see a hike of 75-100 basis points (0.75%-1.0%)

The Fed’s Raison d’etre Is to Create Inflation

Remember, as Kelsey Williams reminds us in his blog today, the real purpose of the Fed “is to provide a structured system, whereby its member banks can create and lend money in perpetuity.” 

How does the Fed do this? By continually expanding the supply of money and credit.

After all, the Fed is of, by and for the banks. The Fed exists for the benefit of banks and their bankers. Their reason for being is simply not aligned with the needs of everyday Americans. 

The Treasury, in tandem with the Fed, continually expands the supply of money and credit by issuing bonds, notes, and bills.

Williams points out, “The money received from the sale of Treasury securities is credited to the Treasury and subsequently spent to pay the government’s expenses,” thus putting money back into circulation.

But the newly issued Treasury securities are in circulation as well and further increase the supply of money and credit. 

This is called monetization of the debt and is fundamentally (in Williams’ words) “an act of inflation.”

And lest we forget, since the Fed’s inception in 1913 has resulted in the decline in Americans’ purchasing power by 99%.

Business Economists Support Tightening

Fed chair Jerome Powell addressed the National Association for Business Economics today. 

He faced a room full of people who think the Fed's policy is too loose — 77% of them, versus 22% who think it’s about right, according to NABE’s latest biannual Economic Policy Survey, released this morning.

NABE consists of economists working in industry who tend to have a more practical, on-the-ground view of business conditions than their academic counterparts. 

This is the highest share to hold that view since the question has been asked, dating to 1995.

Also, 78% of the respondents thought it "likely" or "very likely" that inflation will remain above 3% next year, a bad sign for how embedded inflationary pressures are becoming (at least relative to the Fed’s general goal of 2%).

But it's not just business economists sending the Fed the all-clear sign on a move toward tighter money. 

Markets' adjustment to the beginning of the interest rate-hiking campaign has been relatively well-behaved, especially given the disarray emerging from eastern Europe.

What Does the Future Hold?

After last week’s Fed policymaking meeting, Powell signaled that the Fed is likely to raise interest rates significantly over the next couple of years and begin shrinking its balance sheet—6 or 7 times in 2022 alone. 

But the markets somewhat surprisingly didn’t react too negatively as they had in some past episodes when the Fed announced more aggressive tightening plans.

Longer-term bond yields were stable, too, up slightly last week—as opposed to December 2018, when yields fell steeply, a sign that the Fed's rate hike plans were a mistake and would lead to lower growth. 

Stock markets went on a tear following last week's rate hike, rather than plunging like in past episodes.

It's true in the political sphere as well. President Biden has said repeatedly that he trusts the Fed to take necessary action to bring down inflation.

That suggests there will be no pushback from the administration to the rate hike campaign…at least for now.

Irwin says that none of this means an aggressive rate-raising campaign will be painless, or even that it’s the right policy path. 

It just means that at this point, Powell & Co. have more outside pressure to speed up the tightening than to slow it down.

Although gold and silver are both off last Monday’s highs, they’re off to a good start this week—with gold up 0.7%, or about $13, at $1,936 today and silver up slightly higher (0.8% or 20¢) at $25.28.