With last week’s decision to hike the federal funds rate another 75 basis points, the Federal Reserve disappointed those hoping for only a 50 basis point increase. And Fed Chairman Jay Powell threw cold water on hopes that the Fed might be done anytime soon. Could that end up spelling doom for Democrats?
The Fed and Politics
Richard Nixon was well known for the pressure he put on the Federal Reserve and its then-Chairman, Arthur Burns. He pushed Burns to manipulate monetary policy to boost the economy and strengthen his reelection chances in 1972. But Burns didn’t do the same thing in 1976 for Gerald Ford. And when asked why not, Burns stated that Ford never asked him to.
There are multiple lessons to draw from that anecdote. But the first question we have to ask is, did President Biden ask the Fed to stop its monetary tightening?
We know that the Biden administration tried to ask OPEC to boost oil production or at least not cut production in order to bring down oil prices before the midterm elections. And we know that OPEC decided to cut production well in advance, giving the administration a big middle finger.
It wouldn’t be at all surprising if the White House asked Powell to loosen monetary policy, or at least to temper its interest rate hikes. But Powell, to his credit, seems determined to undo the mistakes of 2020 and has committed to his course of action. He doesn’t seem like he’s going to stop anytime soon.
That could spell disaster for Democrats in 2022, and possibly beyond, as voters are increasingly getting fed up with the direction of the economy. More and more voters have indicated that economic factors are an increasingly important factor when it comes to elections. And with Biden’s poor track record on the economy so far, disenchanted voters could end up fueling a red wave.
Powell’s willingness to stand up to demands from Democrats for monetary easing is a welcome sign from the Fed, even if it is a case of too little, too late. Were the Fed to engage in further monetary easing at this point, there’s a very real possibility that inflation could continue to climb.
When Will the Fed Pause Hikes?
Now the only question people have is when the Fed might begin to taper off its interest rate hikes. Markets had expected that the Fed might drop to a 50 basis point increase in December, but Powell seemed to indicate that December might see another 75 basis point increase, with discussion of scaling back to 50 basis point increases maybe occurring at the next couple of meetings.
So markets have adjusted their view of where the federal funds rate might end up when rate hikes are paused, and it’s likely going to be over 5%. If Powell’s comments are taken to their most extreme, we could see that rate go to 6% or higher before the Fed pauses things.
A pause, of course, would be dependent on inflation making measurable progress in coming back towards the Fed’s 2% long-run target. And with inflation thus far not willing even to come down below 8%, it could be a long while before the Fed’s monetary tightening has any impact.
Already Bernie Sanders and Elizabeth Warren are taking Powell to task for the Fed’s rate hikes, even if the real federal funds rate is still deeply negative. And they’re trying to pin the blame for the coming recession on Powell’s rate hikes, rather than on the monetary profligacy that preceded it.
While it’s certainly possible that Powell’s rate hikes could exacerbate the coming recession, that remains to be seen. But any recession is going to ultimately be pinned on President Biden, as at the end of the day he is still Powell’s boss. Even though the seeds for this inflation were sown during 2020 under the Trump administration, Biden is still going to get slammed for not putting a stop to the out of control spending that resulted in the Fed adding trillions of dollars to its balance sheet and stimulating inflation.
But while Democrats in Washington may feel the pain of Powell’s actions at the polls, American households are going to feel the effects of Powell’s actions in their pocketbooks. High inflation has been eating away at paychecks and savings for months, and the purchasing power of American families is decreasing every month. And even if inflation is brought under control, if it takes a recession to do so or if the Fed’s actions make a recession worse, households are going to be negatively impacted by that too.
Protecting Yourself With Precious Metals
That’s why more and more Americans are looking to protect themselves against loss. Whether it’s loss from inflation or loss from recession, no one wants to lose money. As Warren Buffett says, the first rule of investing is not to lose money.
We’re fortunate that warning signs have been flashing for a long time, giving investors plenty of time to think about protecting their wealth and how they’re going to do it. From falling markets to inverted yield curves to slowing consumer spending, the signs that recession is coming have been piling up. If you haven’t already taken steps to protect your wealth, don’t wait until it’s too late.
One popular method of safeguarding wealth is investment in precious metals like gold. With a gold IRA, you can buy physical gold coins or bars within an IRA and enjoy the same tax advantages as any other IRA account. And you can fund your gold IRA with a tax-free rollover or transfer from an existing 401(k), 403(b), TSP, IRA, or similar tax-advantaged retirement account.
Gold IRA rollovers and transfers are becoming an increasingly popular way to protect tax-advantaged retirement savings, allowing you to reduce exposure to Wall Street and diversify your portfolio with precious metals. If you’re looking to protect your hard-earned savings with gold and silver, call Goldco today to learn more about the benefits of a gold IRA.