Will the Fed’s Pause Be Permanent?

After 10 consecutive meetings with an increase in the federal funds rate, the Federal Open Market Committee (FOMC) finally decided to pause its rate hikes at its most recent meeting. The question now becomes whether the Fed’s temporary pause will become permanent or not.

According to the FOMC’s dot plot released after last week’s meeting, FOMC participants expect the federal funds rate to end up at 5.50-5.75% at the end of the year, which would indicate two more rate hikes by the end of the year. That’s the reason the FOMC’s latest actions have been described as hawkish by much of the media.

But the FOMC is notoriously inaccurate in the forecasting of its dot plots. After all, after the Fed’s March 2022 meeting FOMC participants expected the federal funds rate to be 1.75-2.00%. Instead, it was 4.25-4.50%.

Intention vs. Actuality

Given the FOMC’s latest dot plot, it’s probably safe to say that the Fed intends to raise rates twice more by the end of the year. Whether the Fed will get the chance to do that is another thing altogether.

There was tremendous momentum to keep hiking rates after ten consecutive increases. Now the momentum has shifted, and there’s no guarantee that the Fed will be able to break the inertia of a pause in order to hike rates again. What could cause the Fed to continue hiking rates?

With inflation rates declining to 4%, inflation certainly seems to be continuing in the right direction, although we’re still far from the Fed’s 2% target rate. The next round of inflation data from the BLS will be coming in early July before the next FOMC meeting. If inflation declines then expect the potential for a continued pause, but if inflation stays stagnant or even increases then the Fed might be motivated to hike.

Of course, the Fed’s actions are all predicated on nothing major occurring in the economy. If markets start to decline, or if economic conditions start to deteriorate, then all bets are off. Continuing to make hikes in the face of a worsening economy would be difficult to do, even if inflation were to remain high.

Hiking Cycles and Recession

According to one popular method of gauging recessions, you can tell when recession gets underway because the Fed starts to cut interest rates. We saw that in 2007, as the Fed made its first rate cut in September 2007, a mere three months before the recession officially started.

We also saw it in 2001, as the Fed began to cut rates in January, two months before the recession officially began in March. So once the Fed begins to cut rates again, it could be a signal that recession is imminent.

That’s why markets will be looking closely at the Fed’s direction of monetary policy going forward. While the Fed has signaled that it intends to remain hawkish, developments in the economy may force its hand. And if the Fed begins to cut rates, inertia once again could cause it to keep cutting.

Eyes on the Data

Inflation isn’t the only thing the Fed is going to keep its eyes on, however. Employment data is also a primary concern, with unemployment figures and payroll data factoring in to future FOMC rate decisions.

There’s a lot that can happen between now and the end of the year, and the data could change significantly in that time. Right now we’re heading into summer, which traditionally is a slow time for many businesses. That may give the Fed some cover to hike once more in July if it feels conditions are warranted, but it’s going to mean that, come September, markets are going to be eyeing economic data like hawks.

If inflation stops falling, or if jobs data gets worse, then the Fed is going to have a tough time justifying further hikes, and may actually get pressure to start cutting rates. And once the rate cuts start, the reality of recession may set in.

Protecting Yourself With Gold

The last time the Fed went through a sustained cycle of hikes and cuts like this, the cuts started in 2007 and culminated with a drop to near-zero interest rates in 2008. Throughout 2008, no one wanted to believe that the economy was in recession. They wanted to believe that recovery was just around the corner, and that each successive rate cut would break the economy out of its funk.

That never happened, of course, and the Fed kept cutting rates all the way to the bottom. Knowing this pattern, we have to assume that the Fed will very likely do the same thing this time around as well. So if the Fed starts to cut rates and makes it a habit, that’s a good sign that the economy is close to or already in recession.

During the 2008 crisis many people watched as the retirement savings they had spend years or decades building up dissolved in a matter of months. Markets plummeted over 50%, and investors struggled to find anywhere to put their money.

There was one shining spot, however, namely gold. During the same period markets lost over 50%, gold gained over 25%. And the yellow metal went on to make record highs in the coming years.

Many people today are anticipating what might occur when the economy falls into recession, and they’re starting to protect themselves and their finances by buying gold. With numerous methods available today, from a gold IRA to a direct cash purchase of gold, there are gold options available for every budget.

If you’re worried that the Fed’s pause may signal that recession is just around the corner, now is the time to start thinking about protecting your assets. And if you’re looking to protect your wealth with gold, Goldco can help you.

With over $2 billion in precious metals placements and thousands of satisfied customers, Goldco works hard to ensure that our customers benefit from owning gold. Call us today and learn more about how gold can help you achieve your financial goals even in the face of a looming recession.