The Federal Reserve’s long-awaited tapering of asset purchases was supposed to have started last month, albeit without much change from its previous levels of purchases. The tapering was supposed to have picked up slightly this month, yet the Fed is already signaling that it is hoping to accelerate the tapering. A program that was expected to wind up next June now may end up finishing in March.
Along with the accelerated tapering program, there is much anticipation with the Fed’s timing of interest rate increases, with some analysts expecting up to three interest rate hikes next year. The combination of reduced asset purchases and higher interest rates could provide even further headwinds to an economy that is still struggling to get back on its feet after the events of the past two years.
It isn’t just the Fed’s actions that could slow the economy, although there’s a high likelihood that Fed actions will play an important role in what eventually transpires. But there are three important and fundamental problems facing the economy that could continue to weigh on economic recovery.
1. Weak Job Growth
Job growth remains weak, with millions of workers still unemployed or remaining out of the workforce. While the unemployment rate is now down around 4.2%, which would ordinarily indicate a relatively strong economy and job market, there are still nearly 4 million fewer Americans employed today than before the pandemic.
Adding to the drag on the economy is that the latest job numbers from November came in at a far lower number than the consensus forecast. While economists were expecting the economy to add 550,000 jobs in November, the actual number was 210,000. That’s a stunning miss, particularly during what would ordinarily be a busy Christmas shopping and buying season, when you would expect to see major hiring.
Coupled with that is a continued and stubbornly lower labor force participation rate, indicating that many people who otherwise would have been in the workforce are, for whatever reason, not going back to work. Ultimately there’s nothing that can be done to force people to work if they don’t want to, but that also means that the Fed’s efforts to spur economic growth through loose monetary policy in the hopes of encouraging labor force growth may have been both unnecessary and useless.
While job growth numbers could end up getting revised upward in hindsight, it appears that the job market is just about tapped out. No amount of further stimulus is going to convince people who don’t want to work that they need to get back into the workforce, and the current size of the workforce may end up being the new normal.
2. Higher Inflation
Unless you’ve been living under a rock for the past year, you know that inflation has become a major issue. Prices of food, energy, and housing have been among the highest climbers, and have impacted millions of American households.
Wages haven’t increased nearly as much, however, which is putting people under increasing strain. And with no further stimulus coming from the government, it is becoming apparent that many households aren’t going to be able to deal with the increased costs reverberating throughout the economy.
The Fed seems to have finally gotten serious about the seriousness of rising inflation, abandoning its insistence that inflation is merely transitory. Measures of year on year and month on month inflation continue to rise, and they could rise even further over the course of the next year. That has put the Fed in panic mode, which is why it is rushing to end its asset purchases and potentially raise interest rates.
While both of those actions risk causing an economic slowdown, the risk the Fed wants to avoid is the development of an economic slowdown while interest rates are at zero and asset purchases are still underway. Right now the Fed is between a rock and a hard place – it can’t lower interest rates any further, and it can’t really boost asset purchases.
The Fed needs room to maneuver in order to fight a weakening economy, and that means having interest rates at a level where they can still be cut to help heat up the economy, and having no asset purchases in place so that it can reinstate and ramp up purchases if it feels the need to further stimulate the economy.
Raising interest rates and halting asset purchases could also result in lower inflation in the future, something the Fed is likely hoping will occur. But with over $4 trillion of monetary stimulus having been added to the Fed’s balance sheet last year, will this latest policy turn end up being too little, too late?
3. COVID Unknowns
The greatest fear right now is the continued fear-mongering surrounding new variations of COVID. The delta variant was largely a dud, not resulting in any significant changes or reactions from policymakers. But now we’re hearing about the new omicron variant, which appears to be spreading around the world.
Nearly two years after the first reactions to COVID, we’re still feeling the repercussions of government lockdowns. And while the results of those lockdowns were negative and plainly obvious to most people, that hasn’t stopped politicians in Europe from returning to lockdowns.
We would hope that politicians here wouldn’t retry the same policies that created such havoc in the economy the last time around. But politicians are motivated more by public sentiment and the desire to win reelection than they are with concerns over the economy’s well-being. If their political calculations judge that the negative effects of another lockdown are outweighed by the popularity of another lockdown, the lockdowns will win out.
As we saw from the first round of lockdowns, they can be incredibly destructive. Stock markets lost 35% of their value, and supply chains are still struggling to get back to normal after the unprecedented measures taken to try to combat COVID. Another round of lockdowns would likely wreak even further havoc on the economy, and would further complicate the Fed’s monetary policy actions.
How Are You Preparing?
Of course, these headwinds won’t just affect the Fed, they’ll also affect individual investors like you. If you’re currently saving and investing for retirement, you likely can’t afford to find yourself in another situation in which you’re facing potential losses of 30-50% of your portfolio or more. With inflation rising and the possibility of a Federal Reserve miscalculation sending the economy into a tailspin, the stakes could be higher now than they ever have been.
Many investors remain blissfully unaware of everything that’s happening, lulled into a stupor by stock markets that remain at near all-time highs. And if they don’t act to protect their investments before the next crisis, they could end up hurting.
Many investors were taken by surprise by the 2008 financial crisis, believing the Washington/Wall Street consensus that mortgage market weakness couldn’t affect the overall economy. They learned the hard way that what goes up must come down, and their portfolios suffered accordingly.
But many others learned that when stock markets are weak, precious metals such as gold and silver can be strong. While stock markets lost over half of their value, gold and silver took off. Gold nearly tripled in price in the aftermath of the crisis, while silver nearly quintupled.
Many of those same investors vowed that they wouldn’t be caught repeating the same mistakes during the next crisis, and vowed to protect their hard-earned savings and investments with gold and silver. Are you one of them?
If you’re not, what are you waiting for? The increasing struggles the economy is facing to get back to pre-COVID growth rates are an indication that not all is well. And it’s only a matter of time before the next recession occurs, a matter of when, not if. If you’re prepared for it, the effects on the value of your investment portfolio could be significantly reduced. If not, you could be in for a real surprise, a la 2008.
Thankfully there are numerous options available to help protect your wealth against recession, inflation, and economic crisis. Whether you choose to invest in gold and silver through a precious metals IRA or just by buying gold and silver directly, there are countless choices available to you. With over a decade of experience helping thousands of customers just like you, the precious metals experts at Goldco can help you learn more about those choices.
Whether the next crisis results from the Fed’s previous actions or any future Fed mistakes, don’t let your retirement savings fall victim to the effects of that crisis. Call Goldco today and get on the road to protecting your savings with gold and silver.