By Sean Kelly

Many commentators felt news that U.S. consumer price inflation had risen to a 13-year high would force the Federal Reserve to do something to slow down its money printing.  

In our last post, just ahead of the Fed’s mid-June Open Market Committee announcements, we disagreed. Based on its long record, we suggested that the Fed would simply “try to muddle through, alluding to its seriousness about controlling inflation in the future and carefully monitoring conditions.”  

In other words, we expected all talk and no action. And even though the markets were a bit spooked by a chart (“dot plots”) indicating that some Fed officials were thinking something about doing something about inflation trends by and by, perhaps 18 months down the road, it has all turned out to be another Federal Reserve nothingburger.

That is why today we reiterate our advice to use Fed “jawboning” to your advantage.  

Big moves like the drop in gold prices and the stock market in response to little-noted and less understood policy announcements are not the result of the American people suddenly rushing out to sell in the morning and buy back in the afternoon.  

Fed announcements trigger Wall Street traders, hedge funds, and algorithms instead.

And this time was no different. 

Stocks tumbled on Thursday and Friday after the Fed’s announcement. But as usual, the Fed quickly poured cold water on those that thought tightening was imminent, and stocks reversed course on Monday and Tuesday this week.

Former Reagan administration Budget Director David Stockman saw through the whole episode saying, “Someday historians will surely wonder if the Fed’s hideous ‘dot plot’ was accidentally scribbled on a blackboard in the Eccles Building during bring your grandchildren to work day. The whole paint-by-the-dots rigamarole is really that juvenile. After all, what serious adult thinks you can peer 36 months into the future of a global economy that is slamming and banging in a dizzying stagger and ascertain the correct interest rate to the second decimal point?”

We recommend our friends and clients let this Kabuki theater work to their advantage. Just as the Fed pronouncements spooked stocks, the fast-buck traders on Wall Street also sold paper gold and silver instruments, and knocked gold and silver prices down, too, providing us an opportunity to buy at lower prices.

After all, Fed jawboning is only a way to buy some time. The U.S. government is already indebted beyond its ability to pay, and yet plans to spend even more, even faster. The logic of this predicament was identified years ago by the late investment newsletter writer Richard Russell. For the Fed and the government, it is “inflate or die.”

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