By raising interest rates by 75 basis points for the second time last week, the Fed now claims to have reached a “neutral” monetary policy stance. That means, in theory, interest rates do not stimulate or hinder the economy.
Fed Chair Jerome Powell said: “Now we are in neutrality. It would be appropriate to slow down at some point as the process progresses.”
Chairman Powell effectively communicated to the market his intention to exit the war on inflation.
But inflation remains hot, even as measured by the Fed’s preferred indicator.
The personal consumption expenditures price index hit 6.8% in the Bureau of Economic Analysis’s report Friday.
The federal funds rate, which is currently only 2.5%, does not look “neutral” at all when the official inflation rate hits 6.8%.
Former Treasury Secretary Larry Summers accused Federal Reserve officials of being “expected” about inflation.
“Jay Powell is honest and analytically inexcusable,” Summers told Bloomberg. “It’s unthinkable that the 2.5% rate would be so close to neutral in an inflationary economy like this.”
What Summers and Powell don’t say is that the recession and highly influential financial markets can no longer hold interest rate hikes without a collapse. This is why the Fed is signaling that it will end its tightening campaign before it achieves any kind of victory over inflation.
In the face of 40 years of high inflation, monetary policy has gone from being very compliant to being slightly less compliant.
You won’t reach a completely neutral level, at least in the long run.
Interest rates are necessary for the US financial system and government (the world’s biggest debtor) to continue to exercise restraint. A negative real interest rate allows borrowers to be saved from inflation and increases in nominal asset values over time.
Over time, negative real interest rates also put upward pressure on the precious metals market.
Gold and silver prices fell when the Fed started to get tough on inflation. However, it rebounded last week as central banks lowered their expectations for future austerity measures.
The Fed is not neutral in setting monetary policy. Central bankers inevitably pick winners and losers when manipulating interest rates and providing liquidity to the financial system.
The Fed’s policy winners are usually Wall Street investment bankers and Washington DC politicians. The same applies to owners of tangible assets financed by debt.
The losers are: 1) fixed-income savers and retirees with no income to offset inflation; 2) Workers whose wages do not match the increase in the cost of living.
However, it is possible for individual investors to be on the edge of the Fed’s policymaking.
Investing in stocks is a good idea during several economic cycles. On the other hand, it is far more profitable to be in assets that benefit from the unintended consequences of the Fed’s inflation policy.
When the US economy plunges into recession, traditional stocks become vulnerable. Meanwhile, the demand for alternative safe-haven assets coupled with continued inflationary pressures could be a boon for the undervalued gold and silver market.