After the events of the past week, markets are finally starting to realize two things. First, the Federal Reserve hasn’t done enough yet to curb inflation. Second, the Fed’s attempts to curb inflation should have started a long time ago.
That much is apparent to anyone who has been a longtime observer of monetary policy. It isn’t as though this is the first time the Fed has been caught behind the curve. But this time, being behind the curve could end up destroying trillions of dollars of wealth.
Monetary Policy and Time
One of the characteristics of monetary policy, one which even the Fed will admit to, is that it operates with a lag. The effects of monetary policy actions on the economy take months to see. And because it can take months to establish trends in economic data and to really confirm whether or not an economy is growing or declining, or whether inflation is rising or falling, central bankers tend to wait until they have absolute certainty before deciding on a course of action.
Of course, right now we’re finding out in real time the drawbacks of that hesitation. And unfortunately this current crisis is solely of the Fed’s making.
The Fed first tried to deny that inflation was occurring. Then it tried to claim that inflation was transitory. And only once inflation really started to take off did the Fed try to do anything to stop it.
Had the Fed already started taking action 6-9 months ago, we might not be in the situation we’re in right now. But 6-9 months ago the Fed was still in monetary easing mode, purchasing Treasury securities and mortgage-backed securities to add to its bloated balance sheet.
Had the Fed halted those purchases at the first sign of inflation, and begun hiking rates sooner and more aggressively, there’s a chance that we wouldn’t be sitting at an 8.6% inflation rate right now. But the Fed waited for too long, denying the reality that was staring it in the face, and so we’re in the situation we’re in.
Even yesterday’s 75 basis point increase was a case of too little, too late. Between anemic rate increases and small reductions in the balance sheet, it’s highly likely that nothing will change with regard to inflation in the coming months.
We have three more Federal Open Market Committee (FOMC) meetings before the midterm elections, only two of which could impact inflation rates before the election. Assuming a 75 basis point increase at subsequent FOMC meetings, we’re looking at a federal funds rate of 3.75-4.00% by November, or 4.50-4.75% by the end of the year.
The Fed is also phasing in its balance sheet reduction, with the full extent of drawdowns not starting until September. So by the end of October, the Fed’s balance sheet might have reduced from $8.9 trillion to around $8.6 trillion. And by the end of the year it may be around $8.4 trillion. That’s hardly anything in the greater scheme of things.
And that might have been helpful had these numbers been reached in December of 2021, so that by December of 2022 monetary policy would be even tighter. But the Fed is, as it always has been, too slow to tighten.
This has been the story of the Fed time after time. At the first sign of any trouble in markets, the Fed immediately turns on the monetary spigots. Trouble on Wall Street? Initiate quantitative easing. Problems in overnight repo markets? Start making credit freely available.
There’s no limit to how much the Fed will ease when there’s even a whiff of trouble in financial markets. Yet on the other side, when the economy is facing high inflation due to that easing, the Fed is hesitant to admit that it needs to tighten. It’s afraid of jumping the gun, and instead of taking an aggressive stance, it stands on the sidelines.
It was market pressure that forced the Fed to hike 75 basis points yesterday, versus the 50 basis points that everyone had been expecting before then. And that’s not good.
If the Fed really wants to take on inflation, it has to be active in doing so, not reactive to market pressure. What we’re seeing is a Fed that is following, not leading. And that doesn’t inspire confidence that the Fed is actually going to put a dent in rising inflation.
Who Is Affected
Rising inflation is a problem for every American, but particularly for Americans with significant amounts of assets. You’re now in a position in which your assets are losing nearly 9% of their purchasing power to inflation every year, something which could erode your ability to save and invest for the future.
But if the Fed continues to push interest rates upward in order to combat that high inflation, it risks worsening what looks to be a likely recession. Even if the recession isn’t as bad as 2008, it could still wipe trillions of dollars in wealth off the books, making millions of Americans worse off. And if the recession ends up surpassing the 55% losses we saw in 2008, it could set back generations of Americans, costing them years worth of investment gains.
But just because the Fed is behind the curve doesn’t mean you can afford to be too. Being behind the curve in a potential recessionary environment could mean that you suffer huge losses in the event that markets weaken, especially if the weakening occurs far faster than anyone anticipates.
Many Americans have already started to protect their assets by buying gold and silver. Some have taken advantage of owning gold and silver through a gold IRA or silver IRA, maintaining the same tax advantages as their existing tax-advantaged retirement accounts while benefiting for the potential for gold and silver to make great gains.
Others have preferred more traditional methods of buying gold and silver coins and storing them at home or in safe deposit boxes. No matter which way you prefer to buy gold and silver, Goldco can help you.
With over a decade of experience and with thousands of satisfied customers, Goldco’s experts are ready to work with you when you make the decision to buy gold and silver. Don’t let your hard-earned wealth lose value due to the Fed’s miscalculations. Call Goldco today to learn more about how gold and silver can help you.
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