US Federal Reserve Sticks To The Script But For How Long?

[GoldCore]

Those watching the gold price and price of silver will have noticed the sharp uptick following the Federal Reserve’s announcement, yesterday. This was despite the Fed doing exactly what everyone expected them to do. For now, the Federal Reserve is sticking to its relatively well-telegraphed plan but how long will it be until they need to move the goalposts in order to do so?

Gold and Silver prices rose sharply on the Fed’s statement on Wednesday. The change of tune from ‘higher interest rates are needed to fight inflation” to “we might have raised enough and need slow down increases to see” was apparent in both the statement released after the interest rate setting committee’s two-day meeting and in Chair Powell’s press conference.

Gold Price Chart

Silver Price Chart

The committee voted unanimously to raise the fed funds rate by only 0.25% this time around. Also, hinted that there might only be one more similar hike at their next meeting on March 21-22.

The Committee will also update their economic projections and their outlook for the fed funds rate at the March meeting.

 

After the December projections showed that Fed committee members had increased their projection for the fed funds rate at the end of 2023 from the September projections, we wrote (See our December 15, 2022 post Has the Fed reached peak hawkishness?) that the Fed had reached peak hawkishness. Also, they would start downgrading the speed of interest rate increases and the next projections would backtrack to lower fed funds projections over the next two years.

Fed Fund Rate and Inflation Indicators Chart

Although inflation growth has declined from 40-year peaks in the middle of last year it still remains above the Fed’s two percent inflation growth goal. The Fed is especially focused on a subset of inflation, now monikered “Supercore Inflation”. This so-called Supercore Inflation focuses on the service sector (minus housing services) – these services are generally more sensitive to wage growth.

Services such as lawyers, hairdressers, teachers, and dental services are more likely to be sensitive to the cost of labour than say iPhones which are more sensitive to things like global supply chains and international forces.

The service sector, especially in the hospitality sector (hotels and restaurants) still has more job openings than workers looking for jobs, which also drives wages higher. The theory is that rising wages then increase the cost of services – which increases core inflation further. 

Is Supercore inflation overdue?

There is still an argument to be made that the rise in wages in the service sector is an overdue adjustment to the U.S. economy – as wages have been stagnant in this sector for many years. This has added to the growing wealth inequality in the U.S.

The Fed posted a study on October 22, 2021, titled “Wealth Inequality and the Racial Wealth Gap” which showed that the wealth gap has widened notably over the past few decades in the United States. The average Black and Hispanic or Latino households earn about half as much as the average White household and own only about 15 to 20 percent as much net wealth.

This long overdue structural reset is one reason that we think inflation could run higher than pre-covid levels for some years to come. But the Fed is limited in its options to raise interest rates much higher and instead will start discussing raising the target inflation rate from 2% to something in the 3%-4% range.

See our primer on how central banks set the 2% target in the first place from May 26, 2022 Did Central Banks arrive at their Target Inflation Rate by Mere Fluke? And our post on November 4 Fed will collapse the economy and be forced to pivot which discussed the pivot within the pivot and the benefits of changing the inflation target rates for central banks. 

Gold, Rate Hikes and The Central Bank Illusion?

 

One last item to keep in mind over the next several months is that the Fed’s statement says The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.

The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Although Chair Powell refused to answer any questions on the subject – the Federal Reserve is the fiscal agent of the US Treasury and as the Debt Ceiling Debate rages on the Fed needs to be prepared to step in if Congress does not come to an agreement on raising the debt ceiling. 

Central banks backing off interest rate hikes, higher inflation, and central bank buying are all positive for gold and silver in 2023.

[Bigmarc]

Does anyone know how inflation is measured? Is it from prices a year ago until today?