Last week, on the eve of the Federal Reserve’s latest policy announcement, we asked rhetorically if the Fed would usher in meaningfully higher interest rates and let the economy crash? Would it taper its money printing with the nation’s productivity already shrinking? Or would the Fed just talk a good game about what it will do by and by?
That was our guess. As we explained, “The Fed is losing control. Its assurances that things can be safely managed are hollow. Its options are limited: Crash the economy or tank the currency. It will choose the road most taken. It will choose to tank the currency.”
Now the gold market has endorsed that conclusion. Despite the Fed’s tapering announcement, after closing the day we published our observations at $1,758.50, gold has surged day after day, reaching $1,830 as we write, and moving above both its long- and short-term moving averages.
The Fed announced that it “will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer‑term inflation expectations remain well-anchored at 2%. The committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.”
Well, now.
Inflation is already well above that target. From the Bureau of Labor Statistics October 14 press release: “The final demand index rose 8.6% for the 12 months ended in September, the largest advance since 12-month data were first calculated in November 2010.”
It wasn’t just a one-off. Its press release reporting results through October was more of the same: “The final demand index rose 8.6% for the 12 months ended in October.”
We are perilously close to double-digit inflation.
Meanwhile, Fed Vice Chairman Richard Clarida this week elaborated that the Fed is “clearly a ways away from considering raising interest rates,” suggesting that rates could rise from current level near zero, “by the end of next year.”
Since interest rates are well below inflation by any measure, investors in interest-bearing vehicles are not keeping up. They are losing purchasing power.
But there is more to be said. Currently inflating by purchasing U.S. Treasury and mortgage securities with “money” freshly created by nothing more than a digital keystroke at the rate of $120 billion a month, the Fed says it will taper those purchases by $15 billion each month for the next two months and perhaps will continue to do so in subsequent months, “but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”
If this is beginning to sound like we’ve taken you into impenetrable policy weeds, the description we provided last week will do just as well. The Fed will just talk a good game about what it will do by and by.
One other point though. By the Fed’s own schedule, it will enter 2023 still printing money at the still highly aggressive rate of $90 billion a month, about $3 billion a day.
Why is this important?
It’s important because of the $4.5 trillion the Fed created since early last year. That’s a lot of money that has yet to be assimilated in higher prices. We point again to Milton Friedman’s discovery that there is a lag between the Fed’s money printing and the time it works its way into higher consumer prices. Some today believe that lag can persist for up to two years. So, the Fed is clearly not intent on stopping inflation. When and if the Fed ever decides to stop inflating, the cost of living will continue rising for a long time.
Stated differently, the purchasing power of the dollars you save for retirement will continue to fall.
Doublespeak from the Fed is nothing new. Long-time Chairman Alan Greenspan once said that at the Fed, one “learns to mumble with great incoherence.” Another time he explained, “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.”
Fed Chairman Jerome Powell speaks “Fedspeak” as well. After explaining that the Fed’s bond purchases are designed to keep rates low, he went on to explain, “Our tapering decision does not imply any direct signal regarding our interest rates.”
More confusion in an age desperately hungering for truth and clarity.
No wonder that two Ipsos polls this year show that a majority of Americans do not trust the Fed. Responding to charges about sketchy insider trading by Fed officials, Powell says, “We understand very well that the trust of the American people is essential for us to effectively carry out our mission.”
Gold never asks for your trust, or anyone else’s. It doesn’t need to.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.
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