The latest inflation report seems to underscore one of the problems with official inflation figures While the 32% headline inflation figure remains above the Fed’s 2% target rate, it doesn’t seem...
The Federal Open Market Committee decided at its most recent monetary policy meeting last week to pause rate hikes once again, leaving the target federal funds rate at 5.25-5.50%. That was a move that, while expected by many on Wall Street, has been interpreted by many to indicate that the Fed may be done hiking rates.
Financial markets over the past several years have been notorious for seeing what they want to see, not necessarily what the Fed is actually doing, and for pricing in expectations of Fed behavior ahead of time. Right now bond yields and mortgage rates are tumbling as markets seem to expect the Fed to be completely done with rate hikes and possibly on the verge of cutting rates. But is that a wise expectation?
The Case for Rate Hikes
The major reason the Fed has been hiking rates so aggressively is the fact that inflation got out of control. With inflation rates not surging right now, the pressure to hike aggressively has been reduced.
But the inflation rate jumped from 3% to 3.7% a few months ago and still hasn’t budged. There are two more inflation reports that will come out before the next FOMC meeting, giving the Fed some additional insights into what inflation is doing.
If inflation rates were to rise even higher, that would certainly put some pressure on the Fed to hike rates further. A spike to over 4% would make it hard for the Fed to keep from making at least one additional hike to the federal funds rate.
At the same time, there’s something to be said for inertia. And with the Fed now having paused hikes for two consecutive meetings, it might have to take a real jolt for the Fed to budge once more and add one more hike.
What Has the Fed Done Previously?
The last time the Fed went through this kind of prolonged rate hike cycle was before the 2008 financial crisis. The federal funds rate had been at 1% for almost a year before the Fed began hiking rates in mid-2004.
By mid-2006 the Fed had hiked the federal funds rate to 5.25%, then proceeded to keep rates there for a year. It wasn’t until mid-2007 that the Fed began to cut rates again.
As we all know now, the economy wasn’t in great shape back then. There had already been some signs of weakness in markets as Bear Stearns had started to show signs of trouble due to its exposure to failing mortgages. And the recession that eventually turned into the financial crisis started in December 2007, mere months after the Fed began its rate cuts.
While markets today are cheering the Fed’s decision to pause, and are hoping for potential rate cuts in the near future, they should be careful about what they wish for. Given the Fed’s previous track record during rate hike cycles, we could expect that if the Fed is truly done hiking rates, that the beginning of rate cuts, whenever it occurs, could be the harbinger of the next recession.
Financial markets so far have welcomed the Fed’s decision, with yields on 10-year Treasuries having tumbled 20 basis points in the last two days of trading last week. Yields on other longer-dated Treasury bonds saw similar drops in bond yields.
Mortgage rates have also dropped significantly in recent days, with markets hopeful that the end of high interest rates is arriving. But if the end of the rate hike cycle and the possibility of rate cuts means that recession is just around the corner, many who are hopeful now could see their hope turned into despair.
Conflicting Data Causing Confusion
One reason we’re seeing such confusion is that the Fed has famously said that it is data-driven, yet the data has been anything but crystal clear. On the one hand we have an economy that supposedly grew at a 4.9% rate in the second quarter. But on the other hand we have a labor market that seems to be worsening, with the latest jobs data coming in rather lackluster.
On top of that we have rising credit card debt and rising delinquencies, a housing market that has just about vanished due to high mortgage rates, inflation that is nearly twice as high as the Fed wants it to be, and a national debt that is growing by trillions of dollars every year. Oh yeah, and let’s throw in a new war in the Middle East that could spiral out of control too.
With all of that in mind, it shouldn’t be any wonder that the Fed is trying to act cautiously and judiciously. Every day brings the potential for new developments that could completely upend the economy and force the Fed into action.
There’s not much reason for the Fed to be out in front on things right now. Instead, doing nothing is probably the smart thing to do right now, and just wait to see what happens over the next few months.
Do You Need to Protect Yourself?
While Wall Street may be welcoming the end of Fed rate hikes, that doesn’t mean that the future is looking rosy. Remember our look back to history, where it took about a year and a half between the time the Fed finished hiking rates and the time the economy fell into recession.
Even more ominous, it was only a few months after the Fed starting cutting rates that the economy fell into recession. With that timeline in mind, and knowing that the Fed now has not hiked rates for the past three months, what might we expect?
For one thing, the prospects of a recession in 2024 could be stronger now. If the Fed starts to cut interest rates in mid-2024, recession could come by the end of the year. And if the Fed starts cutting rates sooner, that timeline could speed up.
That’s why it’s important to start thinking about recession now, and about how you are going to protect yourself financially once recession occurs. Many people were caught flat-footed in 2008, trusting the Fed that difficulties in the housing market were isolated and wouldn’t spill over into the rest of the economy.
Millions of people found out the hard way that their trust was misplaced. And they lost trillions of dollars of savings and investments that they had built up over the years.
If you can’t afford to take losses of 50% or more like many people did in 2008, now is the time to start thinking about how to protect yourself. And this is where thinking about traditional safe havens like gold and silver could benefit you.
Gold and silver both performed well in the aftermath of the financial crisis, with gold nearly tripling in price and silver more than quintupling. Many people undoubtedly looked at gold and silver prices back then and wondered why they hadn’t had the foresight to buy more gold and silver.
With the benefit of that hindsight, however, many people today have already started to protect their assets with gold and silver today. Whether they’re starting a precious metals IRA or buying gold and silver directly with cash, demand for gold and silver has remained strong.
If you’re thinking about trying to protect your hard-earned wealth with gold and silver, maybe it’s time to talk to the experts at Goldco. With over $2 billion in precious metals placements and over 5,000 5-star reviews, Goldco prides itself on quality gold and silver products and stellar customer service.
Don’t let your savings and investments fall victim to a recession or financial crisis. Call Goldco today to learn more about how gold and silver can help you protect yourself before it’s too late.
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