“I think he was…the greatest economic public servant of the era.’ It’s common knowledge that Paul Volcker is a professional hero of Fed Chair Jerome Powell.
As inflation in the US climbs, the head of the reserve is working hard to channel some of his hero, but not so much to cause alarm.
Unsurprisingly gold and silver investors are seeing right through it, as are stocks.
As largely expected (see our post from April 27 Expect the Unexpected from the Fed), the Federal Reserve raised the Fed funds rate by 50 basis points on Wednesday.
This was the first increase of more than 25 basis points by the central bank since 2000.
But when Chair Powell “pushed back” on any talk of a larger 75 basis point increase at an upcoming meeting, not only were gold and silver prices boosted but Bloomberg notes that “stocks notched their largest rally on the day of a Fed meeting in a decade”.
In an effort to save credibility Chair Powell started his prepared remarks with a direct message to the American people saying:
“I’d like to take this opportunity to speak directly to the American people.
Inflation is much too high and we understand the hardship it is causing. And we’re moving expeditiously to bring it back down.
We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. The economy and the country have been through a lot over the past two years and have proved resilient.
It is essential that we bring inflation down if we are to have a sustained period of strong labour market conditions that benefit all.” However, in response to a question Chair Powell also noted that
“Yes, there may be some pain associated with getting back to that [inflation of only 2%]”.
Rising interest rates create hardships on households as interest payments increase on major purchases such as houses and cars.
The rise in interest also has a negative effect on equity markets which decreases ‘wealth’. He acknowledged that “People are feeling the higher rates already.”
The Federal Reserve has been strongly criticized for being slow to respond to rising inflation levels.
This is with the Personal Consumption Expenditure Price Index above the Fed’s 2% target since March 2021, to a current multi-decade high of 6.6% in March 2022.
Fed Fund Rate and PCE Inflation Chart
The Federal Reserve also announced that it is going to start reducing the size of its bloated balance sheet next month.
By not replacing assets that are maturing the central bank is no longer a buyer of assets. Thereby supporting the price.
The Fed hopes that it can bring inflation down by the combination of reducing its balance sheet and raising interest rates.
The Fed Has Lost Control Over the Inflation
Despite taking these steps, the Fed has failed to acknowledge that it is its own loose monetary policy of the last few years. This has laid the ground for inflation to take hold.
Instead pointing to the pandemic and Putin’s war as reasons for prices climbing so rapidly, forgetting that they needed an inflationary base upon which to climb from.
The Chair Powell admitted that many of the supply issues are out of the Fed’s control.
These issues are compounded by the ‘zero covid policy’ in China which has entire cities on lockdown. Also, the commodity supply disruptions due to the war in Ukraine.
Shipping snarls remain a huge supply issue with reports of more than 500 ships stuck outside the Shanghai Port.
Major Chinese ports are grappling with congestion as truck and manpower shortages have decreased operations by around half.
The time to move containers has reportedly more than doubled to 12 days from 5 days before the lockdown.
Moreover, according to MarketWatch
“The lifelines of global trade are becoming more expensive, with port congestion worsening and turning widespread world-wide.
One-fifth of the global container fleet is currently stuck in congestion at various ports, and less than 40% of ships are arriving on time.
It currently takes 74 days longer to get goods from a Chinese warehouse to a U.S. warehouse, a route that used to take 37 days .. freight prices are still elevated, while marine fuel prices and insurance costs are soaring.”
Meanwhile the war in Ukraine “has contributed to a historic shock to commodity markets that will keep global prices high through the end of 2024”, according to a report by the World Bank.
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“The spike in energy prices over the past two years is the biggest since the 1973 oil crisis, while the jump in food prices is the most since 2008 …
Russia is a leading exporter of oil, natural gas, and coal, while Ukraine is a major source of wheat and corn.
The situation has been exacerbated by soaring fertiliser costs and price spikes for key metals …
After nearly doubling last year, energy prices are expected to jump more than 50% this year before easing in 2023 and 2024.
Food prices will soar by 22.9% this year, highlighted by a 40% rise in wheat prices”, according to the World Bank report.
Although, as we noted above, the Fed is trying to ‘save credibility’ by acknowledging that it is aware of the effect of high inflation on households, the supply problem examples listed above are out of the Fed’s control.
How Can the Fed Fight the Inflation Now?
The only thing that the Fed can do is to raise interest rates to lessen demand – by households having to pay more interest, which gives them less to spend on other items.
Chair Powell states he will ‘curb demand’ until it is back in balance with supply.
But considering that the increase in interest rates this week of the Fed funds rate to an upper limit of 1% is still well below the 6.6% of the increase in the PCE price index.
It is likely that the Fed will continue to ‘keep interest rates ‘lower for longer’ given the increase in inflation than it has in the past.
The notion that Chair Powell will raise interest rates ‘like Volker did in the 1970s’ is out of the scope in today’s economic environment, see Even Volcker Couldn’t “Volcker” in Today’s Economic Conditions.
For more thoughts on how long the Fed will manage to tighten for, as well as the true reason for them doing so, keep an eye out for the next week’s interview with economist Simon Hunt.
Simon believes tightening by the Fed is unsustainable and unlikely to continue past the US midterms.
Subscribe to our YouTube channel to be the first to hear when the interview goes live, and to hear why Simon believes Russia is pushing for a gold-backed currency.
From the Trading Desk
Market Update
The much anticipated Fed meeting took place yesterday, the 50 basis point rise was more or less priced in but the market was looking for more colour on what Powell would say regarding future increases.
We got a less hawkish fed as Powell said 75-basis point rate hikes are not on the table for upcoming meetings.
However, this 50 basis point increase was the first increase over 25 basis points by the central bank since 2000.
The market reacted positively with the USD weakening, treasuries pulled back from their recent highs, stocks rallied and gold popped.
Gold got back above the crucial USD 1,900 in early trading on Thursday.
Next week CPI numbers will be released for April.
The March numbers were the highest since 1981 at 8.5%.
This will be an interesting indicator to see has inflation peaked for now at those highs in March.
The Fed is in a tricky position as it tightens, Powell says a ‘Soft Landing’ is still likely, lets see but the US economy is cooling.
Last week’s GDP number declined 1.4% versus an expected 1% gain.
New home sales for March were down 8.6%.
Stock Update
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
04-05-2022 1868.70 1863.65 1493.09 1492.60 1774.14 1769.54
03-05-2022 1857.90 1869.70 1482.23 1491.27 1768.91 1771.35
29-04-2022 1915.45 1911.30 1525.08 1522.35 1811.63 1814.59
28-04-2022 1890.00 1888.50 1509.35 1520.05 1795.31 1797.85
27-04-2022 1896.15 1885.80 1506.68 1501.85 1787.31 1787.74
26-04-2022 1903.40 1904.60 1497.02 1501.97 1779.68 1784.99
25-04-2022 1918.70 1895.00 1507.14 1488.33 1786.69 1767.66
22-04-2022 1942.00 1941.55 1508.74 1508.39 1797.71 1796.32
21-04-2022 1945.95 1943.70 1489.43 1488.10 1782.10 1788.59
20-04-2022 1947.55 1949.55 1494.74 1493.36 1797.00 1797.49
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