While much of the attention surrounding discussion of stimulus spending focuses on Congress, hardly anyone seems to be paying attention to the organization enabling Congress’ spending: the Federal Reserve. Without the cooperation of the Fed, there would be no way for Congress to fund this spending. Issuing trillions of dollars of debt at low interest rates only works when you have a buyer for that debt, and the Fed has been only too willing to buy.
The Fed is arguably the only game in town right now, and the only reason the economy hasn’t completely imploded. But stimulus checks and money printing can only carry an economy so far, and eventually their effect will wear off and economic reality will set in. When that happens, it will be bad news for the economy.
But no matter what happens, the Fed will play a central role. Here are three reasons investors need to pay attention to the Fed, what it says, and what it does.
1. The Fed, Labor Markets, and Inflation
The Fed has operated for decades under a “dual mandate,” namely to promote full employment, stable prices, and moderate long-term interest rates. To that end, the Fed generally looks at two primary figures for guidance: the unemployment rate and the inflation rate.
In Fed Chairman Jay Powell’s recent remarks, he noted that despite the official unemployment rate being at 6.3%, using more accurate calculations to take into account the number of people who have left the labor market would result in an actual unemployment rate closer to 10%. Powell also pointed out that total employment in January was more than 10 million below its February 2020 level, a figure that surpassed the worst of the Great Recession.
For those looking for a Fed rate hike or at least some movement toward monetary policy regularization, it’s going to take labor markets returning to normal before that happens. That would mean the economy would need to add over 450,000 jobs each month by the end of 2022 for a rate hike to occur then, or nearly 300,000 jobs per month by the end of 2023 for a rate hike then. The odds of job growth anywhere close to those rates within those time frames are slim, meaning that the likelihood of the Fed hiking rates within the next three years is just about nil.
The wild card here is the inflation rate. The Fed has signaled its willingness to allow inflation to remain elevated for a while, yet inflation still hasn’t outstripped the Fed’s traditional 2% target rate. But with money supply figures having increased exponentially over the past year, rising inflation could become a problem. While weak labor markets may mean the Fed will be hesitant to raise rates, what happens if inflation begins to accelerate? A 4% inflation rate may not be enough for the Fed to start tightening policy, but what happens if CPI begins to increase by 6%, 8%, or even 10% per year? Will that get the Fed to hit the brakes and begin tightening monetary policy?
2. Asset Purchases Continue
Right now the Fed has pledged to purchase at least $80 billion of Treasury securities and $40 billion of mortgage-backed securities each month, in order to provide accommodative monetary policy. That’s nearly $1.5 trillion in new monetary stimulus each year, on top of a balance sheet that’s already over $7 trillion in size.
Remember that QE1 started off at only $600 billion in size before ballooning to over $1 trillion, QE2 was $600 billion, and QE3 was initially only $40 billion per month. So the Fed’s “normal” level of annual asset purchases today is almost the size of QE1 and QE2 combined. And if this continues over the course of the next few years, it will make previous rounds of quantitative easing look like a drop in the bucket.
This amount of quantitative easing can’t last forever, because there are only so many assets that the Fed can purchase. At the current level of asset purchases, the Fed is purchasing nearly double the total annual growth of US GDP, which in recent years has increased by $800 billion to $1 trillion per year. That means that the ratio of the Fed’s balance sheet to US GDP is higher than ever in history, and that’s worrying.
3. Rising Deficits Mean More Fed Intervention
What’s even more worrying is that this might just be the tip of the iceberg. The Fed’s current policy decision is most likely based on current expectations of federal spending. The federal government was expected to run a $2.3 trillion deficit in Fiscal Year 2021, on top of a $3.7 trillion deficit in FY 2020. But that doesn’t take into account the projected passage of President Biden’s $1.9 trillion stimulus package, which appears all but certain.
That would drive the projected total federal deficit for FY 2021 to over $4 trillion, and that at only halfway through the fiscal year. A deficit that large would likely require the Fed to increase its asset purchases accordingly, as a $1.9 trillion issuance of Treasury debt onto the open market would likely be too large for debt markets to absorb. And that would further tighten the relationship between the Fed and Treasury and the tendency toward direct monetization of federal debt.
The real danger is that the Fed will never again say “No” to the federal government, and the rising level of government spending will result in even more money creation that will never end. As more and more money enters the economy, the effect, all other things being equal, will be higher prices. We’re starting to see a bit of that today, but the major price rises that will accompany further money creation may take a while to materialize. When it does happen, however, it could come suddenly, and those who aren’t prepared may find themselves struggling to catch up.
How to Prepare and Protect Yourself
By all estimations we’re entering a phase of monetary intervention that is unprecedented in US history. We’re in uncharted waters, with a central bank that has shed its mandate in its desire to benefit the federal government at the expense of investors and savers. The effects of that policy shift could have disastrous effects on Americans’ standard of living.
Inflation affects every American, but its effects are most pronounced on the elderly and retired, who often depend upon fixed incomes. As the prices of food, energy, and healthcare continue to rise, vulnerable older Americans increasingly find themselves between a rock and a hard place, forced to decide where to spend their increasingly devalued dollars. Do they cut back on heat to afford to eat more, or stop taking medications in order to stay warm? Those are tough decisions that no one should be forced to make, but with increasing inflation they may not have a choice.
If you want to keep yourself from having to make those tough choices, it’s incumbent upon you to maximize your retirement savings so that you can live your golden years without fear of running out of money. And that means making the right investment decisions before retirement so that you won’t have to worry about money once you’re retired.
More and more investors are turning to gold to provide them with not only the asset protection they need, but also the asset growth that can benefit them in retirement. Gold looks to be on the cusp of a major bull market, with the conditions right for multi-year price growth. As inflation rises and the Fed continues to create more and more dollars out of thin air, the gold price should continue to rise, making gold an ideal investment for those looking to protect their retirement savings from being devalued due to inflation.
If you have existing retirement accounts, you can roll over or transfer funds from those accounts into a gold IRA, allowing you to benefit from the protective abilities of gold while still maintaining the same tax advantages as your current retirement accounts. And those rollovers and transfers normally occur without any tax consequences.
Do you have retirement savings that you’re interested in protecting? Are you worried about the effects of the Fed’s money creation on the value of your savings? If so, you need to think about protecting your savings sooner rather than later. Contact the experts at Goldco today to find out how gold can protect your retirement dreams against the ravages of inflation.