Has the Fed reached peak hawkishness?

[GoldCore]

Laurence J. Peter said,

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

Right now we think this might be the motto that helps central bankers sleep at night. Terrifying as that may seem, investors do not have to just “wait-and-see” what impact central bank policies will have on their portfolios. Gold and silver are excellent ways to hold assets outside of the financial system and to add a level of insurance to your portfolio, that no other asset can provide. 

The Fed’s statement released this week was little changed from the November statement – and continues to say it sees additional increases into next year. However, the Fed’s updated projections show that slower growth and higher unemployment somehow equal still higher inflation and a higher fed funds rate.

Gold and silver both declined when the statement first came out but then rose to finish the day virtually flat – after rising sharply yesterday on softer U.S. Consumer Price Inflation (CPI) data.  

Gold Price Chart

Moreover, data released yesterday show that both Total and Core CPI data declined from the peak earlier this year. The year-over-year increase in Total CPI came in at 7.1% in November down from a peak of 9.1% in June, Core CPI increased 6.0% year-over-year in November, down from a peak of 6.6% in September. 

US Consumer Price Inflation Chart

Is inflation on a sustained downward path?

It is not only actual inflation that is showing signs of easing, but inflation expectations have also eased substantially, both market indicators and consumer survey indicators and even wage growth is rolling over. 

However, yet somehow Chair Powell says that’s not enough. Additionally, in his opening statement of the press conference, he stated that the Fed needs “substantially more evidence that inflation is on a sustained downward path”. 

He went on to say that the Fed has raised the Federal Funds Rate by 4.25% but that more tightening will likely be necessary to bring inflation down to the 2% target. Also, according to the Fed’s projections, they think that it will take more tightening than they thought at the September meeting – to the tune of .75% total increases next year vs the previously projected .25%.

It seems counterintuitive and counterproductive that the Fed now projects higher inflation and a higher Fed funds rate… than it did in September; but raised the fed funds rate by only .50% this month, vs the .75% back in September.    

Top 5 Gold Buyers’ Motives Revealed

 

Chair Powell’s explanation was that the focus has changed from the speed/pace of the increases to the ultimate level of the fed funds rate, and then how long the Fed will remain restrictive. Interpretation: the Fed has no idea how fast or how high to raise rates, they will reassess at the next meeting in February.   

The Fed started raising rates later than the data suggested – behind the curve of inflation going up, and now they are slow to recognize that inflation is declining, economic growth is slowing and the labour market is not as strong as it appears from the job openings numbers. 

The Fed has reached peak hawkishness

Our view is the Fed has reached “peak hawkishness” and that the Fed will start on the lagged downward revisions in their projections. 

And this is not to say that inflation will go back to pre-covid lows – as we have stated many times before higher inflation is likely for many years to come. See our post on January 28, 2021 Gold, The Tried-and-True Inflation Hedge for What’s Coming! And as our post-Fed will collapse the economy and be forced to pivot after last month’s meeting suggested a higher inflation target could be in the future.

Powell of course denied this as a course of action but did slip and say that the Fed could look at this as a longer-run project.

What does all this central banker lingo mean for physical metals investors?  Well, today’s inconsistencies of logic prove that: one – the Fed is ‘winging it’ and always has been… two – owning physical metal remains a great way to avoid becoming trapped in these crazy banker leverage games.

Moreover, gold and silver don’t rely on anyone or anything for their validation as wealth. While central bankers constantly must seek validation from politicians and levered speculators in alternating turns. Today once again proves it best to simply avoid riding their merry-go-round.

The gold price is one thing, but have you looked at the gold price ratios? And what about central bank purchases of gold bullion? Both of these are brilliant indicators around not only future price movements, but also ongoing sentiment for physical gold. Check out our gold-price ratio and central banks buy gold videos, here.