Gold and Silver Performed Just as Expected
With so much focus on inflation over the past several months, or worsening economic productivity, or mounting job losses in the tech sector, who would have thought that the most acute problems in our...
It’s no secret to anyone that inflation in the United States has been incredibly destructive. Not a household in the country hasn’t felt its effects, whether at the grocery store, at the gas station, or in the increasing cost of housing. But most Americans thus far seem to have taken things in stride.
While inflation hasn’t been without its difficulties, there hasn’t been a major clamor to get inflation under control… yet. By and large, the American public trusts the Federal Reserve to manage inflation and bring it back closer to the long-term 2% target it has chosen. But what if that trust is misplaced?
What if the Fed isn’t capable of managing inflation? What if the Fed can’t get inflation below, say, 4%? What happens if trust in the Fed begins to erode?
If the central bank is unable to bring inflation under control, it could have devastating economic consequences for the country. And if trust in the Fed erodes, it too could have a negative impact.
One of the first arguments against the Fed’s ability to be able to control inflation is the fact that the Fed never even recognized inflation in the first place. Any outside observer who watched the federal government’s stimulus spending from March 2020 onward, and who saw the Fed’s balance sheet expand in response to that spending, knew that inflation was a potential problem.
That became all the more apparent when money supply figures began to increase. Unlike in 2008 and afterward, when much of the Fed’s quantitative easing programs were effectively neutralized through interest payments on reserves, the Fed made no effort to neutralize its monetary injections in 2020.
We watched as money supply figures grew significantly faster than in previous years, and many of us feared that inflation would skyrocket. Yet the Fed continued to downplay the dangers of inflation, even denying that inflation was occurring even as prices began to rise at stores and official inflation figures began to increase.
Only after inflation began to become readily apparent did the Fed finally acknowledge it, although it stated that inflation was only “transitory”. Yet this “transitory” inflation reached all the way to 9% at one point, and still remains elevated today.
The Fed has vowed that it won’t rest until inflation is defeated, and it has raised interest rates and begun reducing the size of its balance sheet to do so. Yet inflation remains stubborn, with the latest CPI figures coming in at 6.4% year on year.
Even worse, the latest core personal consumption expenditures (PCE) inflation figures came in hotter than expected, at 0.6% month on month and 4.7% year on year. Markets took that as an indication that inflation has begun to accelerate once again to begin the year. And that is raising fears that the Fed doesn’t have control over inflation.
Jamie Dimon, CEO of JPMorgan Chase, has publicly stated that he believes the Fed has lost control of inflation. That’s not a very comforting statement, even if Dimon doesn’t believe that the US economy is going to fall into recession. If the people who are supposed to be the cheerleaders for the economy are publicly stating their lack of confidence in the Fed, that’s a very bad sign for the future.
Considering the Fed’s track record on inflation to date, it’s not unreasonable to believe that it has allowed inflation to get away from it. After all, the relatively quick drop from 9% inflation to 6.5% inflation may have allowed Chairman Powell et al. to think they knew what they were doing. But now that the Fed is back to smaller interest rate hikes, and inflation is either stuck or, worse, starting to reaccelerate, the Fed may have to kick monetary tightening into high gear.
The latest inflation figures certainly have markets thinking that the Fed is going to keep hiking interest rates this year. And rather than the federal funds rate topping out at 5% as many had predicted, it’s not out of the question that the Fed may have to push rates even higher, to 6% or even more.
The next consumer price index (CPI) release is due to be released on March 14th, and the Fed meets the following week, with a monetary policy decision expected on March 21st. The next PCE numbers aren’t to be released until March 31st, although the Fed may very well be able to get its hands on preliminary data. In any case, expect next month’s inflation numbers to weigh heavily on the Fed’s next monetary policy decision.
If the Fed loses control of inflation, or if it has lost control of inflation already, the results could be catastrophic. The US economy has essentially been managed by the Fed since the 2008 financial crisis, and markets are hardly accustomed to market discipline anymore. If inflation were to suddenly accelerate and the Fed couldn’t control it, the economy could end up suffering.
For one thing, high inflation would continue to harm households who are already reeling from high prices. Businesses would be negatively impacted too, as higher input prices and lower consumer spending would put them between a rock and a hard place.
Perhaps most dangerously, a Fed that thought it had lost control would do everything it could to gain control back. And in this case, gaining control over inflation means pushing up interest rates as high as possible to rein in inflation.
Very few people today really remember the impact of ultra-high interest rates in the early 1980s when Paul Volcker tried to wrangle inflation. And those rates didn’t stick around for very long, as inflation was brought under control and interest rates gradually fell again.
If the Fed loses control of inflation today, however, it could try to hold rates high for as long as it can, potentially damaging the economy and, if not causing a recession, causing an existing recession to worsen.
We all trust the Fed to know what it’s doing, and that trust may be misplaced. If the Fed makes mistakes, all of us suffer the effects, from devalued savings and investments to potentially losing our jobs and our houses.
That’s why so many Americans today are taking steps to try to protect themselves and their wealth against the possibility of a Fed-caused crisis. They realize that inflation has been eating away at their hard-earned money, and they’re looking for ways to protect themselves against inflation. Many have found that protection with gold.
Gold has been trusted as an inflation hedge for centuries, and its performance in recent times has helped solidify that reputation. During the 1970s, for instance, gold’s annualized gains were over 30% per year over the course of the decade. If inflation were to become entrenched today, gold owners are hoping for a repeat of that kind of performance.
Buying gold doesn’t have to be difficult, either, as investment vehicles like a gold IRA can make the process relatively easy. A gold IRA allows you to roll over or transfer assets from existing retirement accounts tax-free, allowing you to use those assets to buy physical gold coins or bars. And with those physical, tangible gold assets you can have peace of mind knowing that they’re safely stored at a bullion depository maintaining their value in the face of high inflation.
If you’d like to learn more about the benefits of gold, call the precious metals experts at Goldco today. Don’t leave your hard-earned wealth at the mercy of the Fed, and don’t let it lose one more cent in value to high inflation.
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