The recent FED meeting halted interest rates while helping gold bullion catch a bid. It was speculated that this was due to worry about the damage caused by rate hikes, and they didn’t want to hike any further. This view led to gold prices being very well supported. This would have occurred even if the FED had not explicitly said this was the cause. That was incorrect because the FED raised rates again, this time by 25 basis points. We’re presently between five and a quarter and five and a half percent. The market’s massive gain could be one reason for the FED’s ability to sneak in another rate hike; the gold market has been stubbornly firm.
One of the reasons the market was so strong was that many people came to the same conclusion as many other financial commentators that the FED was finished. So the market relief rallied as the rate hikes may have ended, and this market rally created a sense of comfort for the FED that they thought they could get away with slipping in another rate hike. The chances of a rate rise were over 100% before the decision. Over the years, the FED has learned that it should never surprise the market. As a result, if the market expects the FED to raise rates, the FED will raise rates. Gold is sniffing out the fact that the US government cost to service its debt is so high at the current interest rate that the central bank will need to lower rates soon.
The same holds in other major markets such as Great Britain. A well-known London gold bullion dealer confirmed that demand for gold is increasing, not falling, as central banks tighten their monetary policies which is a sure sign that retail investors expect the gold price to surge when rate hikes are stopped.
It makes no sense for the FED even to hint that rate reduction could occur as early as next year when the FED has also removed a moderate recession from their prediction. The last time the FED convened, they forecasted a recession, which they never did. They have clarified their forecast by predicting a moderate recession, but they still predict a recession. They have since altered their minds. According to Powell, based on economic data since that forecast, the economy appears strong enough that the FED’s base case is now a gentle landing in which the economy avoids recession. We don’t even have a recession, let alone a significant increase in unemployment. This has helped the silver market, which typically underperforms gold at the onset of a financial crisis, at least initially.
If the Fed truly believes there will be no recession, and according to Powell, we are still a long way from attaining the 2% inflation target. “Inflation is still too high, it’s a threat, it’s eroding purchasing power, it’s hurting the middle class, it’s hurting the poor, we’re a long way from victory,” Powell remarked numerous times. Many Eastern central banks do not appear to agree as they stockpile gold bullion in their vaults whilst they can still secure the physical gold at today’s spot price.
Given that we are still far from meeting the inflation target and the economy is so strong that they aren’t even concerned about a recession, why would they discuss rate decreases as soon as next year? Nonetheless, the most significant announcement of the meeting was Powell’s admission that the Fed would not wait for 2% inflation before beginning to decrease rates. Powell stated, “we don’t believe we’ll be back to 2% inflation until sometime in 2025,” but that the FED anticipates the first-rate decreases in 2024. Why lower rates if you’re still not at your 2% target? This has reinforced the confidence in the gold market and is why the demand for assets such as gold sovereigns, gold bullion bars, and coins is as strong as it is, notwithstanding the most rapid increase in interest rates ever witnessed.
Powell was attempting to argue that we don’t need to wait. We’ll assume that if we’ve made enough progress and are on the right track, rates will fall anyway. We’ll assume that the past rate hikes placed us on a path where we can still get to 2% even if we start reducing mid-rates, which is absurd. Powell acknowledged that the Fed’s policy remains restrictive but may be neutral by next year if not accommodative. Powell stated that interest rates could be reduced to below-neutral levels next year.
How are they going to accomplish this? We’re not even close to meeting the inflation target. Yes, the headline CPI has dropped to 3%, but it will not stay there. Oil prices plummeted by nearly half between the summer of 2021 and around 2-3 months ago. That was mostly responsible for the drop in headline CPI from 9% to 3%. Oil prices have risen by over 25% in the last three months. Oil has had its fifth consecutive strong week. We finished above $80 per barrel. Petrol prices in the United States are currently the highest they’ve been all year. Other commodities have already begun to turn, and history shows us that the gold and silver markets will benefit from this.
The dollar index is decreasing but is balanced and has returned to around 101. However, the dollar is in a significant downturn. Everything you’re looking at, all these forward indications, point to inflation being worse, not better, that the days of decreasing inflation are over, and we’re about to enter a period of higher inflation. Investors should consider increasing their allocation of wealth to a physical, inflation-proof asset such as gold and silver coins and bullion bars.
With that in mind, how can Powell discuss decreasing interest rates as early as next year? Not only are rates not being raised, but they are being reduced. Powell stated that interest rates will not be raised until inflation falls below 2%. He warned us that if we did that, we would overshoot. We have to start decreasing rates even before we reach 2%, ostensibly to keep inflation from falling too low, which will never happen. Is there another reason Powell wants to warn the markets that rate cuts are on the way that they won’t pay attention to? Ignore the heights today; instead, consider the cuts implemented tomorrow.