Authored by Michael Maharrey via SchiffGold.com,
GoldĀ had dropped by over $100 in the last two weeks. Meanwhile, the dollar rose to a 7-week high on May 17. If youāre thinking that this looks a lot like how gold and the dollar moved at the height of the Federal Reserveās inflation fight, youāre right. Thatās because the central bankers at the Fed have stepped up the hawkish rhetoric in the last couple of weeks increasing expectation that interest rates will stay higher for longer.
But talk is cheap. The real question is how will the Fed respond when the bottom drops out of the economy.
Fed-Speak
Over the last two weeks, several Federal Reserve officials made comments emphasizing their resolve to carry through with the inflation fight and indicating that interest rates wonāt go down anytime soon.
Chicago Fed President Austan Goolsbee, who typically tends to lean toward dovishness said it is āfar too premature to be talking about rate cuts.ā
Atlanta Fed President Raphael Bostic was more hawkish, saying that policymakers wonāt be thinking about rate cuts āuntil well into 2024.ā He also said he would be inclined to continue raising rates into a recession.
What weāve seen is that inflation has been persistently high, consumers have been really resilient in terms of their spending, and labor markets remain extremely tight. All of those suggest that thereās still going to be upward pressure on prices. If thereās going to be a bias to action, for me it would be a bias to increase a little further as opposed to cut.ā
Bostic also emphasized that getting inflation back to 2% is ājob number one,ā saying, āIf thereās going to be some cost to that, weāve got to be willing to do that.ā
Cleveland Fed President Loretta Mester also took an aggressive tone, saying rates are not yet at a point where the central bank could hold steady.
I donāt put it in terms of a pause; I put it in terms of a hold. Have we gotten to that rate yet? At this point, given the data weāve gotten so far, I would say no.ā
Richmond Federal Reserve President Thomas Barkin toldĀ BloombergĀ that he was ācomfortableā seeing interest rates rise even further.
I think the message sent in the last statement was one of optionality, it wasnāt one of a pause or a peak. I want to learn more about whatās happening with all these lagged effects (from earlier rate hikes), but I also want to reduce inflation. And if more increases are whatās necessary to do that, Iām comfortable doing that.ā
New York Federal Reserve President John Williams sounded a similar tone saying, āWe havenāt said we are done raising rates,ā adding, āIf additional policy firming is appropriate, weāll do that.ā
This all dovetails with the hawkish tone that Jerome Powell tried to setĀ during the press conference after the May FOMC meeting.Ā He emphasized that the Fed is now in a ādata-dependentā mode and insisted that āa decision on a pause was not made today.ā
We on the committee have a view that inflation is going to come downānot so quickly, it will take some time. In that world, if that forecast is broadly right, it would not be appropriate to cut rates.ā
He also hinted that the Fed could hike further, āWe are prepared to do more if greater monetary policy restraint is warranted.ā
As we have seen over the last year-plus, any indication that the Fed will keep hiking has boosted the dollar and weighed on gold. This has been the case over the last week as the open-mouth operations from the Fed have boosted expectations that the Fed will raise rates in June from 12% to 22%.
Meanwhile,Ā a majority of economists polled byĀ ReutersĀ said they think the Fed will at least hold rates at the current level through the end of 2023 even if there is a recession.
Talk Is Cheap
But talk is cheap. Itās easy for Fed officials to say, āWeāre committed to slaying inflation. Weāll keep raising rates even if the economy dips,ā when the economyĀ appearsĀ to be on relatively solid footing. The real question is what will the Federal Reserve actually do when the economy tanks.
History tells us they wonāt stick to their guns, and theyāll go right back to easy money policies to prop up the economy. They did in after the dot-com bubble popped. They did it in 2008. They did it in 2018 when the stock market tanked and the economy got wobbly with just modest tightening. And they did it in spades during the pandemic.
The disconnect seems to be that Fed officials and economists in general think the looming recession will be relatively mild. In fact, after the May FOMC meeting, Powell still insisted the Fed could get price inflation to the 2% target and bring the economy to a āsoft landing.ā
Bank of America chief US economist Michael Gapenās recent comments typify mainstream thinking.
In our view, rather than lean against aĀ mildĀ recession, the Fed would view it as an acceptable price for bringing inflation back down to target.ā
Notice Gapen says āmild.ā
The problem is there is no reason to believe that the coming recession will be mild. If the bust is proportionate to the boom, weāre in for one hell of a bust.
The Federal Reserve and the US government pumped trillions of dollars of stimulus into the economy during the pandemic. This was on top of the trillions of dollars it pumped into the economy after the 2008 financial crisis. It held interest rates artificially low for well over a decade. This created all kinds of malinvestments and bubbles in the economy. As Peter Schiff put it,Ā the Fed has screwed up everything that is a function of interest rates.
Over the last year, the Fed has pushed rates to the highest level since before the 2008 financial crisis. While it stillĀ hasnāt gotten price inflation anywhere near the 2% target, there is no way that this isnāt going to break things in an economy that depends on a low interest rate environment. Weāve already seen cracks in the system withĀ the ongoing financial crisis. The Fed managed to paper over that withĀ its bailout, but itās only a matter of time before something else breaks.
But right now, everything basically seems fine. Sure, weāre seeing some contraction in the economic data. But the labor market is still strong (based on the cooked government data)Ā and consumers are still spending (themselves into record levels of debt). Until there is a crisis, nobody is going to believe thereās going to be a crisis.
Think about it. The mainstream has a pretty bad track record of seeing things coming, as Schiff pointed out during a recent interview.
Why couldnāt they see 2008 coming? That was obvious. Why couldnāt they see this inflation problem? I mean, they were claiming it was transitory when it was obvious that it wasnāt. Itās all about spin when it comes to the government. Theyāre never going to be honest. Theyāre either going to lie about whatās going to happen, or maybe theyāre just so ignorant that they really canāt see what is clearly apparent to anybody who objectively looks at the facts. So, youāve got to think for yourself and recognize that the government is never going to tell you about a crisis. You just need to prepare for it yourself.ā
Itās also important to remember that the 2008 financial crisis happened over a year after the Fed stopped raising interest rates. In fact, it was already cutting rate when the Great Recession kicked off. There is always a lag between changes in policy and the impacts of those changes.
So, this brings us back to the operative question ā what will the Fed policymakers do when the poo actually hits the fan? Do they have the fortitude to follow through on their tough talk? Or will they fold like an old card table?
History tells us they will fold. And until they prove otherwise, there is no reason to think they wonāt. In the immortal words of Pretty Woman, āThatās the fork they know.ā
When faced with a crisis, they will almost certainly implement ātemporary emergency measuresā to hold everything together. That means rate cuts and quantitative easing.
This is why Schiff says weāre not just facing a recession.Ā Great Depression 2.0 is incoming.
But unlike the depression of the 1930s, where the people at least got the benefit of falling prices that provided some relief. During the depression, you lost your job, but at least the cost of living went down. And if you didnāt lose your job, you were actually better off because you had your paycheck and your paycheck went further because consumer prices fell during the 1930s. But this time, even the people who donāt lose their jobs are going to suffer because theyāre going to lose the value of their paychecks. Theyāre going to lose the value of their savings. Because everything that you need to buy is going to be a lot more expensive. And thatās going to compound the burden for the unemployed. Because not only are they going to be without jobs, but their savings are going to be destroyed. And even if they get checks from the government, itās not going to be enough to afford the basic necessities.ā
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