Fed Hikes Rates Again Even as Recession Looms


At last week’s Federal Open Market Committee, the Federal Reserve decided to hike its target federal funds rate once again. The hike was expected, although there was some speculation as to whether the FOMC would hike rates by 75 basis points as expected, or by 100 basis points as some had hoped in order to really start to combat inflation. In the end the FOMC decided on the more conservative approach of hiking rates by 75 basis points, but was it still a case of too little, too late?

Fed Chairman Jay Powell had the unenviable task of trying to keep a straight face as he tried to claim that the US wasn’t in a recession. Unfortunately, he was undercut the very next day as official second quarter GDP numbers came out, confirming that the US economy had shrunk for a second consecutive quarter, the official definition of a technical recession.

The Fed is clinging to the narrative, as is the White House, that just because the economy is contracting doesn’t mean that the economy is in recession. It is trying to point to other factors that supposedly indicate that the economy is in strong shape. But it’s increasingly obvious that any figures that are rosy aren’t actually indicative of the strength and health of the economy.

The obvious question now is, what will the Fed do next?

The Fed’s Timeline

This latest FOMC meeting was the last one before the Fed, and most of Washington, leaves town during August. The next indicator of the Fed’s direction will come at the Jackson Hole Economic Symposium in a month, an event sponsored every year by the Kansas City Fed. After that, the next monetary policy decision doesn’t come until September 20-21.

Many people are expecting the Fed to pause or at least to slow down the pace of interest rate hikes in September, as it should become clearer at that point that the economy is in recession. The expectation is that the Fed won’t try to continue hiking interest rates into a recession.

But we also have two more inflation reports coming out before that September FOMC meeting, and if inflation continues to increase, or if it remains above 8%, it’s highly likely that the Fed may continue on its current course in order to bring inflation under control. At this point the Fed has a tough decision to make: stay the course and tackle inflation, or return to monetary easing to try to forestall a recession but end up making inflation worse.

Indications That Worse Is Coming

The problem with the Fed’s way of thinking is that its conduct of monetary policy has two primary aims: maximizing employment and ensuring stable prices. Because of that, the Fed focuses on employment and inflation rates to judge how effectively it is doing and how strong the economy is.

Right now, it’s no surprise that inflation is high and rising. But the unemployment rate remains low, and tightness in the labor market remains. Due to that, Fed officials believe that the economy is still in good shape, otherwise they would expect to see the unemployment rate rising.

But GDP has now contracted for two consecutive quarters, and is expected to decline again in the third quarter. Feeding into that is a significant decline in the well-being of American households.

The personal savings rate shot up significantly during the fiscal stimulus of the past two years as households received “free” money from the federal government. But now that the gravy train has ended, reality is setting in.

The personal savings rate has plummeted significantly from its highs, and has now fallen below the post-2008 average level. That’s an indicator that households are having a more difficult time making ends meet. We’re not down yet to the sub-3% levels we saw in the years before the 2008 crisis, but the trend is definitely there.

Many households are resorting to credit to make ends meet, but the growth in credit card usage is slowing. That’s an indicator that consumers are pulling back on spending now that they have to repay their bills. And it’s an indicator that consumer spending, which makes up about 70% of the economy, could be slowing even further in the future.

Obviously the unemployment figures are an anomaly. So rather than assuming that low unemployment means the economy is healthy, the Fed should be trying to figure out why unemployment numbers remain low despite other figures indicating an upcoming recession.

Break Away From the Crowds

Everyone in Washington seems to be bending over backwards right now to explain how the US economy is really in great shape and how falling GDP and other signs of trouble really aren’t that bad. There are political motivations behind that, with the midterm elections coming up in November and Democrats hoping for a miraculous economic recovery to save their bacon.

Wall Street still seems to buy the hype, as markets have largely shrugged off all the bad news and seem to expect that the Fed will do an about face and start cutting interest rates and easing monetary policy if the economy continues to falter. But with the obvious and ominous parallels between 2008 and today, that may not be a safe course of action.

With so many people seemingly oblivious to the looming recession, now’s the time to start thinking about how to protect yourself when the full force of the recession arrives. So many people remain complacent, and they could find out the hard way that the next recession could end up being a repeat of 2008.

But if you prepare in advance and make plans to protect your assets, you could ride out the next recession in better shape than many who don’t have that kind of foresight. And gold can help you with that protection.

Gold has served as a safe haven asset for centuries, protecting wealth during tough times and economic turmoil. It maintains its value and purchasing power over the long term, and often performs tremendously during times of recession or inflation. Just look at how gold performed during the 1970s, with annualized growth of 30% over the course of the decade, or during the 2008 crisis, when it gained 25% while markets lost over half their value.

It’s not too late to buy gold either, as the price is the most affordable it has been in months. Whether you’re interested in protecting your tax-advantaged retirement accounts with a gold IRA or just looking to buy gold coins directly to store at home, Goldco has what you need to help you protect your wealth with gold. So call the experts at Goldco today to learn more about how gold can help you safeguard your savings.

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About the Author: Paul-Martin Foss