Higher for Longer, But for How Long?

All eyes are on the Federal Open Market Committee once again this week, as the Committee meets again to discuss whether or not to raise the target federal funds rate. The current target rate is 5.25-5.50%, and the Fed passed on a decision at the last meeting, despite inflation having picked up in recent months and sitting at 3.7% year on year.

Federal Reserve policymakers have consistently reiterated their desire to keep interest rates higher for longer, but how high will they get and how long will that last? Markets seem to just now be slowly realizing that the Fed is serious, as stock markets have shown signs of weakness in recent weeks.

But much of the broader economy seems yet to have experienced the worst impacts of interest rate hikes. It seems as though many companies are only now slowly starting to deal with the impacts of higher interest rates.

Wall Street Hoping for a Cut

When the Fed first started raising interest rates, many people on Wall Street expected a quick pivot and return to rate cuts. But the Fed stayed the course, and has thus far resisted pressure to return to cutting rates.

Prognostications by both economists and Fed policymakers now have the Fed not returning to rate cuts until next year at the earliest, and possibly late next year. There’s almost certainly no chance that the Fed will cut rates this year.

The consensus estimate for this week’s FOMC meeting seems to be that the Fed will once again hold interest rates steady. While inflation remains elevated and is thus putting on pressure to raise interest rates, the large jump in GDP growth to 4.9% would counteract that pressure.

For a Fed that is supposedly data-driven, the various data points coming in right now can seem conflicting. There’s a growing unease about the future, and about the strength of the economy, but it seems that every time a piece of negative data comes in, a piece of positive comes in to counteract it.

For that reason, a Fed hold this week seems likely. But there are two other reasons the FOMC might want to punt this week and wait until December’s meeting to make another decision.

First is the fact that the December meeting will come after two additional consumer price index (CPI) releases from the Bureau of Labor Statistics (BLS). While inflation picking back up is worrying, having two additional data points in hand should give the FOMC a better idea of whether or not its actions to date have done enough to keep inflation low.

If inflation were to rise to over 4% in either of the next two CPI releases, for example, then that would be a clear indication that inflation isn’t under control, and might be a strong reason for the Fed to hike rates in December. Conversely, if inflation were to fall back to 3% over the next two CPI releases, that might spur the Fed to keep pausing on any interest rate action.

The other reason the Fed might wait until December is that the December FOMC meeting is one that is scheduled to have a press conference and a release of updated economic projections. Since interest rates are already at relatively high levels compared to post-2008 levels, Chairman Powell may want to wait for press conferences to explain interest rate hikes, so that markets aren’t left reeling and asking for answers if an unexpected rate hike comes through.

At this point, every interest rate hike is going to send additional shockwaves through the economy. As the economic impact of higher interest rates begins to spread throughout the economy, people are going to want more explanations if interest rates are pushed even higher.

If the Fed continues to pause and hold interest rates steady, there’s a good chance that it might maintain these levels for some time to come. Holding rates steady at these rates lessens the chance that Fed might overshoot on its interest rate hikes, which otherwise might precipitate cutting interest rates sooner.

So while Wall Street may welcome pauses because they’re not as impactful as hikes, the effect of these pauses could be to lengthen the amount of time that the Fed keeps interest rates high.

The Impact on Your Finances

It seems as though markets are only just now beginning to realize that the Fed is serious about keeping interest rates higher for longer. Whereas once Wall Street thought the Fed might have to start cutting rates by the end of the year, now that isn’t forecast until 2024.

Prices throughout the economy will likely start to reflect the impact of these higher rates. The housing market, for instance, is still showing no signs of significant price drops, even though housing affordability is worse than ever. But at some point those sticky prices are going to have to drop if interest rates remain this high.

The same will likely happen throughout the economy, as goods and services dependent on cheap financing see demand drop as interest rates remain elevated. The longer interest rates remain elevated, the greater the pressure on prices to fall.

That kind of pressure will likely make its way to markets too. Easy money fueled markets for over a decade, and now the gravy train has ended. Wishful thinking can only go so far. At some point markets will adjust to the new monetary reality and we could see a significant shift in asset prices.

If a recession occurs, of course, that would only exacerbate the impact of higher interest rates. And with more and more people fearing recession, and more and more signs pointing to an economic slowdown, recession can’t be ruled out.

If you’ve saved and invested for years and have built up a considerable nest egg, you may be worried about how you might fare during another recession. That’s particularly true if you suffered through the effects of the 2008 crisis.

Back then markets lost over 50% of their value, then struggled for years to get back to where they had been before the crisis. To say that the crisis was catastrophic for many people isn’t an understatement.

But not all assets fared that poorly. Gold, for instance, gained 25% during the same period that markets lost more than 50% (October 2007 to March 2009). And the gold price continued to climb, with gold setting record highs in 2011.

The gold price has recently climbed again, and has once more exceeded its 2011 highs. Fear of loss, desire to hedge against inflation, and looking to cash in on a climbing gold price are some of the many reasons gold demand has been strong for the past several years.

If you’re looking to protect your assets against recession, inflation, or other financial calamity, maybe now is the time to start thinking about buying gold. From direct cash purchases to gold IRAs, Goldco has helped thousands of customers benefit from buying gold.

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