Federal Reserve

The One Thing the Fed Is Doing That No One Is Talking About

be quiet

Last week’s Federal Open Market Committee didn’t ruffle too many feathers, as the Federal Reserve decided for the sixth straight meeting to hold interest rates steady. But while markets and pundits were focusing on inflation and interest rates, it’s something else the Fed did that really is important.

It’s understandable to focus on inflation and interest rates, as everyone today is questioning the Fed’s ability to keep inflation from continuing to rise. And with even rate hikes being rumored as a possibility at one point, interest rate policy is front and center.

But there’s something else going on behind the scenes that is arguably just as important as what the Fed is doing on interest rates. And no one is really focusing on that, which could be dangerous.

The Fed’s Balance Sheet Drawdown

At one point the Fed’s balance sheet reached nearly $9 trillion. But the Fed has been drawing that balance sheet down for over a year, minus a small blip during last year’s bank failures.

Now the Fed’s balance sheet is below $7.4 trillion. That’s still a far cry from the roughly $1.5 trillion it should be if the Fed were really interested in normalizing monetary policy, but at least the Fed stuck to its monetary tightening for a while.

At last week’s FOMC meeting, however, the Fed decided to reduce the monthly cap on its Treasury security drawdown from $60 billion a month to $25 billion a month, starting in June. The cap on agency mortgage-backed security (MBS) drawdowns will remain $35 billion a month.

The Fed has never hit that cap on agency MBS because it can’t afford to reach that cap without damaging mortgage markets in a major way, so that unchanged cap isn’t doing anything really. It’s the Treasury cap that everyone needs to watch.

Reducing that cap means that instead of running off up to $720 billion in US Treasury securities each year, the Fed will instead only offload up to $300 billion. That will significantly slow the rundown of the Fed’s balance sheet and could have an impact on the money supply and inflation.

What we saw when the Fed first started reducing its balance sheet was that the money supply fell along with the balance sheet reductions. But eventually that relationship broke apart, as the money supply started to level out and even increase, while the Fed’s balance sheet continued to decline.

The Fed lowering the cap on Treasury rundowns will therefore put even less downward pressure on the money supply, and is basically a loosening of monetary policy. It’s not easing, as the balance sheet will still decline, albeit slowly, but it’s a definite first step towards eventual interest rate cuts.

What most people haven’t picked up on is the fact that the Fed is doing this at the same time as inflation remains problematic. And why is inflation rising again? Well, the money supply is rising again, although more slowly than before.

If the money supply ends up increasing at a faster rate due to the Fed’s lowering the Treasury runoff cap, then this latest move will end up making inflation worse, not better. And while everyone is watching the Fed’s interest rate moves, it could actually be the balance sheet moves that end up impacting inflation more.

While this balance sheet move isn’t as big a deal as an interest rate cut, its impact could be just as big, and it is certainly setting the stage for further easing in the future, as well as setting the stage for eventual interest rate cuts.

What Happens Next?

What everyone wants to know now is, what will the Fed’s next steps be? Well, it seems certain that the Fed won’t be hiking rates.

You don’t wind down your balance sheet reduction and then hike rates, it’s just giving with one hand and taking away with the other. So the next step will likely be some sort of easing.

Will the next step be a complete end to the balance sheet reductions, say in September or October? Or will it be a first cut?

In any case, the Fed is trying to give itself room now to maneuver once recession becomes evident. By winding down its balance sheet reduction, the Fed is opening itself to the possibility of further quantitative easing down the road.

And more importantly, the Fed is signaling that easing monetary policy is its next course of action. It’s up to us now to protect ourselves against that easing.

Protect Your Financial Well-Being

What further easing means is very likely higher inflation. Once the Fed starts cutting rates, it could end up doing so along with further monetary easing, especially if the next recession ends up being severe.

Remember what happened during last year’s bank failures, as the Fed pushed hundreds of billions of dollars into the financial system even though it was committed to drawing down its balance sheet. If the coming recession ends up being as bad or even worse than feared, the Fed could end up pushing trillions more dollars into the financial system, just like in 2020, and inflation could end up soaring.

The Fed only has one trick up its sleeve when it comes to combating recession, and that’s monetary easing. If you know that, and you know how to defend yourself against it, you can help protect yourself against its negative effects.

That’s why more and more people are choosing to protect their financial well-being with gold. Gold has been a trusted safe haven asset and inflation hedge for centuries, and continues to play that role today.

During the 1970s stagflation, for instance, gold’s annualized rate of growth was over 30% per year over the course of the decade. So if the 2020s end up becoming as stagflationary as the 1970s, many gold owners are hoping gold repeats that kind of performance.

During the 2008 financial crisis, gold gained 25% during the same period that markets fell over 50% (October 2007 to March 2009). And in the aftermath of the crisis, gold nearly tripled from its 2008 lows to hit all-time highs in 2011.

Gold has hit all-time highs again recently, and looks poised to continue growing as the US economy shows increasing signs of weakness. And that’s why now could be the best time to buy gold.

How many people wait until it’s too late to protect themselves financially during times of crisis? How many people get caught up in euphoria and buy high, only to fall victim to fear and sell low during the depths of the bubble bursting?

Don’t be one of those people who lose everything by waiting until it’s too late to protect yourself. Call Goldco today to learn more about how gold can help you weather the coming economic storm.

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