Tough talk from the Fed roiled markets this past week, with stocks as well as precious metals getting hit.
On Thursday, Federal Reserve chairman Jerome Powell said the central bank intends to pursue a more rapid pace of interest rate increases. He indicated that a 50-basis point hike in May is likely.
Jerome Powell: We really are committed to using our tools to get 2% inflation back and I think if you look at, for example, if you look at the last tightening cycle, which was a two-year string of 25 basis point hikes from 2004 to 2006, inflation was a little over 3%. So, inflation's much higher now and our policy rate is still more accommodating than it was then. So, it is appropriate, in my view, to be moving a little more quickly. And I also think there's something in the idea of front-end loading, whatever accommodation one thinks is appropriate. So, that does point in the direction of 50 basis points being on the table, certainly. We make these decisions at the meeting and we'll make them meeting by meeting, but I would say that 50 basis points will be on the table for the May meeting.
Fed officials are vowing to get their benchmark rate up to a “neutral” level by the end of the year. Futures traders are currently anticipating a 2.75% Fed funds rate.
Whether the Fed will actually get there is questionable. A downturn in the economy or a panic in the stock market would likely halt the Fed’s rate hiking campaign dead in its tracks.
Another question is whether the rate hikes that do come will be enough to blunt inflation pressures. The latest Consumer Price Index report shows price levels rising at over 8% annually. Even if inflation cools off in the months ahead, it may not get down to anywhere near the Fed’s 2% target.
Negative real interest rates are likely to persist regardless of how many nominal hikes central planners push through.
That means savers who are hoping for money market yields to catch up with the inflation rate will be disappointed. The need to seek alternative vehicles for saving and preserving wealth is as pressing now as ever.
The worst of the inflation wave could be yet to come.
There are signs that food costs will continue to accelerate higher and a very real possibility of widespread global food shortages. The Russia-Ukraine war will severely diminish farm output in the region. And as Russia is a major producer of fertilizer ingredients, Western sanctions are constricting global supply chains to farmers.
To make matters worse, rail transportation backups in the U.S. are limiting delivery of fertilizer to farmers. Union Pacific Railroad announced this week that it will reduce service to fertilizer suppliers by 20%. Grain capacity is also being reduced.
This development couldn’t have come at a worse time for farmers heading into peak planting season.
What comes next could be social unrest. Inflation uprisings are already occurring in Third World countries.
At the very least, an uprising at the ballot box this November seems certain to occur. President Joe Biden’s approval ratings are low and going lower every month as inflation frustrations mount.
Voters shouldn’t expect any serious political solutions to the current predicament. Yes, there are some things a new Congress could do to push back against the Biden spending agenda and open up domestic energy production.
But regardless of which party controls Congress, the cycle of government spending and borrowing will persist. And an unaccountable Federal Reserve will continue to enable it all by expanding the currency supply.
Despite their tough talk on tightening, central bankers always bend to pressure from Wall Street whenever markets come undone.
Fiscal and monetary soundness won’t return to Washington any time soon. But individual households can still opt to put themselves on a sound money standard.
It starts by doing the opposite of what the political class has been doing over the past few decades. Since abandoning gold backing for the currency, spending and borrowing have exploded and the value of the U.S. dollar has plummeted. That is the root of the current inflation problem.
Households that spend and borrow recklessly will grow poorer over time even as they enjoy the temporary high of new cash infusions from creditors. Those who do what seems to be the responsible thing by saving can also grow poorer over time as any savings denominated in Federal Reserve notes lose value.
There may be a place for chasing growth opportunities when they present themselves in equities and other markets. But a solid foundation of cash reserves should come first.
The best form of cash isn’t issued by any government. It’s dug from the earth by miners and refined into sound money in the form of gold and silver bullion.