When it comes to trying to understand why markets behave the way they do, it can be important to realize that psychology can play just as important a role as reality. And that’s perhaps never been more evident than it is today.
With inflation at the highest levels we’ve seen in 40 years, an economy that is showing more and more signs of weakness, and the possibility of a major recession on the way, you would think that markets would have begun to react to all of these negative events. Yet it seems that markets have instead brushed off any concerns about the future and assumed that everything will continue to be A-OK.
Fed Chairman Jay Powell tried to throw cold water on that attitude last week with his comments at the Kansas City Fed’s annual Jackson Hole monetary policy conference. Markets have been operating under the assumption that the Federal Reserve will pivot at some point in the near future from monetary tightening to monetary easing in order to combat a potential recession. But Powell made it clear that the Fed intends to do no such thing.
Is Powell Channeling His Inner Volcker?
The Fed is facing a conundrum. With inflation at near 40-year highs, it faces a real challenge in trying to return to its 2% inflation goal. And that calls for aggressive tightening of policy. But with a recession imminent, markets have expected that the Fed may pivot at some point and return to loosening in order to minimize the impact of a potential recession.
Essentially the Fed faces this quandary: tighten policy and risk recession, or loosen policy and risk inflation rising even further.
So far markets have operated under the assumption that the Fed will loosen policy in the coming months in order to try to forestall a recession. After all, the Fed has operated along these lines ever since the 2008 financial crisis, acting as a guarantor of financial stability and bailing out the economy time after time.
But it’s important to realize that the Fed isn’t the economy’s backstop, nor is it supposed to bail out markets every time things look to head south. The Fed has a mandate to ensure stable prices, full employment, and moderate long-term interest rates. That’s it. Bailing out Wall Street isn’t one of its mandates.
Chairman Powell seems to have finally gotten wise to that reality, and reaffirmed the Fed’s commitment to fighting inflation. And, unlike previous Fed Chairmen who often prefer to speak in Fedspeak, Powell was unusually blunt.
While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.
That, combined with Powell’s comments about how the Fed’s policy will be “sufficiently restrictive to return inflation to 2 percent” make it clear that the Fed won’t be returning to monetary easing anytime soon. And that sent markets tumbling last Friday.
Why Markets Fear Fed Tightening
The past 14 years have seen an unprecedented level of money creation. Money has flowed from the Fed to Wall Street and helped buoy markets. But that easy money has left markets addicted to cheap money and credit. And now that the Fed is taking away the fix, markets are reacting as you might expect.
This is where the disconnect between psychology and reality comes in. Markets have still been operating under the assumption that the Fed will have to pivot and loosen monetary policy. They have been discounting all the indicators that the Fed is sticking to its policy of tightening. So Powell throwing cold water on those expectations on Friday was enough to send markets tumbling.
It’s very likely that markets may continue to expect the Fed to pivot, and may try to price in those expectations. And it may take continual speeches on the part of Powell and other Fed policymakers to finally drive home the fact that the Fed is serious about driving down inflation.
How long will it will take for markets to finally grasp that the Fed is serious about combating inflation? It’s anyone’s guess, but when it finally takes hold, don’t be surprised to see markets behave very, very poorly.
This is the result of the moral hazard the Fed has created with its post-2008 monetary policy. Because everyone has become so conditioned by the Fed bailing out Wall Street at the first sign that markets may be trending downward, everyone now expects that policy of bailouts to continue.
Every time the Fed says that it’s serious about tightening policy and keeping interest rates high in order to fight inflation, markets don’t actually believe that. But markets can only go so long denying reality before they have to react to what is actually happening on the ground, not what they wish is really happening. We’ll probably keep seeing this dynamic play out over the next several months as markets slowly but finally come to grips with the reality that the Fed means business and is serious about trying to keep inflation under control.
Protect Your Wealth Today
The one benefit to markets discounting the Fed’s willpower is the fact that it’s not too late to start protecting your wealth. Markets may not have done too well this year, but they’re still doing far better than they were in 2020, so getting out now could mean you’re still better off today than you were back then.
Many Americans have already chosen to start protecting themselves and their wealth by buying gold, taking advantage of gold’s reputation as a safe haven during times of economic turmoil and financial distress. And with numerous options out there, there is no better time than now to start buying gold.
With a gold IRA, you can roll over or transfer assets from existing 401(k), 403(b), TSP, IRA, or similar retirement accounts tax-free, allowing you to protect your retirement savings with physical gold or silver coins or bars. That gives you the ability to benefit from any future gold price growth, while also protecting you against the possibility of a coming recession.
For those who don’t have retirement accounts, or who don’t want to touch their retirement accounts right now, you can also make direct purchases of gold or silver coins. Goldco has established relationships with numerous mints around the world, allowing us to offer you 100% guaranteed authentic gold and silver coins straight from the source.
With thousands of satisfied customers over the years and over $1 billion in successful gold and silver placements, Goldco has become one of the most trusted names in the precious metals industry. Give us a call today to learn more about how you can start putting gold to work in protecting your hard-earned wealth.