The Fed Is Lagging More Than Usual

When it comes to monetary policy, one thing that is almost certain is that monetary policy actions will always lag. The effects of monetary policy actions won’t be felt for weeks or even months. And monetary policy actions will always react to events that have taken months to develop.

That’s part of the nature of monetary policy. Attempting to make changes that will have a nationwide effect have to take into account data collected nationwide. And the time it takes to accumulate that data, analyze it, and determine what is happening necessarily takes a lot of time.

For that reason, monetary policy has always been treated as a broad brush, a tool to respond to macro-level issues, and never something to respond to micro-level issues. But in recent years it has been used to respond to things as inconsequential as unease in financial markets. And as a result, there has been an increasing amount of pressure from Congress and the White House for the Federal Reserve to use monetary policy in an increasing number of instances.

What such pressure fails to take into account, however, are the inevitable lags that occur. And recently the Fed has been lagging even more than many would like.

When Is Lagging More Than Lagging?

One could argue that the recent lag in the Fed’s policy responses is one of choice rather than necessity. It was obvious from the outset of the Fed’s monetary policy actions in early 2020 that they would lead to rising inflation.

The Fed added $3 trillion to its balance sheet in a matter of months, an increase of about 75%. Unlike after the 2008 crisis, however, the Fed this time around didn’t try to mop up all the trillions of dollars it created.

After the financial crisis, the Fed had used policy tools such as paying interest on excess reserves to make sure that the trillions of dollars of assets purchased during quantitative easing (QE) didn’t enter the economy too quickly. That essentially neutralized the money created during QE, keeping all that money within bank reserves and ensuring that inflation didn’t rise.

The Fed didn’t do anything like that in 2020 onward, and so all of the trillions of dollars it created are now circulating through the economy and the financial system, leading to rising prices. We’re seeing the effects of a massive creation of money, only delayed as one might expect.

Since the initial trillions were used to make payments to individual households, it took a while for that money to hit the banking system. Once it was there in the financial system, it could then begin to circulate and the money multiplier could then take effect.

That’s why the lag between the time the Fed’s new money was created and the beginning of rising prices was so long. But now that prices are finally starting to rise, and those price increases are beginning to accelerate, we may not have seen the end of it.

Inflation is now at 6.8% year on year, and could rise even further. But the Fed tried to deny for months that inflation was a problem, even after numerous analysts pointed out that it was going to be a problem.

The Fed tried to insist that inflation was just “transitory,” reflecting the surge of consumer demand that had been pent up after the lockdowns. But in reality this inflation is the result of the Fed’s money creation that began in 2020 and is still ongoing, so it was never going to be transitory.

By denying first its own role in creating inflation through its ultra-loose monetary policy, and secondly the fact that inflation was rising and poised to become a problem, the Fed wasted valuable months that could have been used to combat inflation.

How Will the Fed Combat Inflation?

The Fed finds itself now in between a rock and a hard place. It has to try to combat inflation in an economy that’s threatening to slow down. If the Fed starts to hike interest rates and decrease the size of its balance sheet, it risks causing a recession. But if fails to do either of those things, and continues with its foot on the gas, it risks continuing high and rising inflation, which brings with it its own risk of recession.

Fed Chairman Jay Powell is now in the position no central banker wants to be in. No matter what he does, he’s all but certain to create a crisis. So will he get serious about inflation, slowing money supply growth to keep prices from rising? Or will he continue easing so that the economy doesn’t enter a recession?

Either way he decides, there are political calculations involved, and his decision won’t be easy. But no matter which way the Fed moves, your savings and investments could be at risk.

The Effect of Monetary Policy on Your Money

Let’s start with the effects of inflation on your money, because that’s what everyone fears the most today. With inflation at nearly 7%, that means that any cash holdings you have are losing 7% of their purchasing power each year. And any investment returns that don’t at least match the level of inflation are actually making negative real returns. In other words, you’re at best just treading water.

If inflation continues to rise, the purchasing power and value of your investments will continue to be eroded. So if the Fed doesn’t do anything to combat inflation, your retirement savings could lose more and more value each year.

If the Fed does decide to take on inflation, through raising interest rates or reducing the size of its balance sheet, it could have a major impact on both bond and stock markets. Bond markets that have grown accustomed to trillions of dollars of low interest rate debt will now see many corporations unable to roll over their debt at higher interest rates. Defaults will likely rise, and many bond investors could see significant losses. If you’ve followed conventional wisdom and increased your bond holdings as you near retirement, that could cost you.

Stock markets have been buoyed by all the new money the Fed created, and pulling that money out of the system would deflate the Wall Street bubble that has been growing for years. We saw that happen before the 2008 crisis, as the Fed hiked interest rates and helped cause the housing bubble to collapse. And if the Fed does the same thing this time around, there’s no telling how badly the stock market bubble could collapse.

That’s why it’s more important than ever to protect your savings, before a crisis occurs. The Fed’s first two monetary policy meetings are at the end of January and in mid-March, and interest rate hikes could occur at any time. Markets are starting to deal with the possibility of four interest rate hikes this year alone. And if you’re not prepared, well, you’ll be playing catch up.

Many people have already started to protect themselves and their hard-earned savings, by purchasing precious metals such as gold and silver. Gold and silver have a long track record of protecting wealth and gaining value during tough economic times. During the 1970s stagflation, for instance, both gold and silver made average annualized gains of over 30%.

With modern investment options, you can even invest in gold and silver through a gold IRA or silver IRA, allowing you to buy and hold precious metal coins or bars while still enjoying all the same tax advantages as your current IRA or 401(k) account. And you can even use the existing funds in your 401(k), IRA, 403(b), TSP, or similar account to fund your gold IRA or silver IRA tax-free.

Just because the Fed may be lagging doesn’t mean that you should too. Don’t wait too long and leave your hard-earned savings at the mercy of Federal Reserve monetary policy. Call the precious metals experts at Goldco today to learn more about how gold and silver can help safeguard your savings.