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Fed Forced to Choose Between These Two Equally Scary Possibilities

So far, inflation has subsided a bit but remains stubbornly high, despite a series of interest rate hikes. Now the Fed faces a tough choice between two lose/lose scenarios…

Fed Forced to Choose Between These Two Equally Scary Possibilities
Should we stand on the tracks and hope the train misses us – or run straight at it?
Photo by Vaikrant Pandav

From Peter Reagan at Birch Gold Group

In the recent era of what feels like endless inflation, we keep hoping for something that would cool it off.

In fairness, the Federal Reserve led by Jerome Powell has been raising rates slowly after each meeting (even though they started later than they should've). The result of that approach has cooled inflation over the last six months, from 4.5 times over the Fed’s target 2% rate to just 3.2 times higher.

That’s progress!

If we zoom out just a little, we’ll see 6.4% year-over-year inflation is still hotter than at any point in the last 30 years. Most of us have either forgotten how to deal with such a high-inflation environment, or we’ve never in our lives faced this situation.

It’s no wonder that nearly half of the public think the U.S. is either on the brink of, if not already in, a recession.

In fact, Raheel Siddiqui, senior research analyst at Neuberger Berman, recently predicted that the 2023 recession “will be more severe than expected.”

Further insights from Siddiqui offered even more bad news:

the economy will have to endure some additional pain in the form of rising unemployment for inflation to subside. That could mean continued rate increases that could send the economy into a deeper recession than experts are expecting. The Fed has a longer road than even the Fed is saying.

“A longer road” means keeping interest rates higher for longer – effectively slowing the economy for longer. That’s bad news for economic growth.

Side note: Remember, these continued rate increases effectively increase the cost of credit. Borrowing money for any reason gets more expensive. This throws cold water on the economy, slows down spending and leads companies and households to become more conservative. That’s why investors hang on the Fed’s every press conference and obsess over the minutes of every Fed Open Markets Committee (FOMC) meeting.

So will the Fed “stay the course,” and keep rates high enough to end inflation despite the inevitable recession? Or will the Fed capitulate before the inflation bonfire is fully extinguished?

Let’s take a quick look at the implications of each path.

What happens if the Fed stays the course?

Bankers and other Wall Street crybabies don’t like it when the Fed raises rates, because that means they don’t get to borrow at low costs and speculate with cheap money.

In the media, you’ll see this reflected in endless calls for a “Fed pivot,” effectively a return to near-zero interest rates. Even while inflation remains hot.

Why? Because the “inflation tax” doesn’t affect everyone evenly. The wealthiest 1% of Americans disproportionately benefit from rising asset prices during inflationary periods.

Meanwhile, pretty much everyone else suffers.

Strategist David Rosenberg is somewhat optimistic, and he put the economic situation inside the U.S. into perspective by describing how he thinks things will play out:

The recession’s just starting... Investors can expect to endure more uncertainty leading up to the time – and it will come – when the Fed first pauses its current run of interest rate hikes and then begins to cut.

Fortunately for investors, the Fed’s pause and perhaps even cuts will come in 2023, Rosenberg predicts. To summarize, the Fed’s anti-inflation fight will continue to crush the economy.

That’s one path. What happens

Here’s what a Fed pivot would look like

Remember last week when we reported Mohamed El-Erian’s claim that the Fed’s 2% inflation target is a pipe dream? El-Erian hopes that “we learn to live with stable 3% to 4% inflation.”

Should the Wall Street establishment get their way and the Fed give up on their efforts to fight inflation? Well, the ever-controversial Peter Schiff articulates the consequences of either course, predicting red-hot inflation could become the new normal:

At some point, [investors] are going to come to terms with economic reality. And that reality is that unless interest rates go much higher from here and that produces  a massive recession or financial crisis – we either have to suffer from all of that, or inflation is here to stay. We can’t live in this dream world where the Fed only raises interest rates to about 5% or slightly higher, and that’s all it takes to bring inflation back down to 2%, and everything is great, and the Fed could lower interest rates back down to a number that a highly indebted economy has been used to over the last decade or so.

Either everything comes collapsing down because the Fed actually fights inflation, or the Fed stops fighting inflation to try to keep everything propped up and we have to live with high inflation indefinitely.

Once again:

  • Low rates are great for speculative economic growth, but feed higher inflation
  • High rates crush both inflation and economic growth

Of course, “indefinitely” can be a long time – between six and twenty years (based on historical precedent).

The historic inflation we’re experiencing today isn’t likely to last forever. But isn’t a decade long enough?

Right now, you might be asking yourself: “How can I prepare for a potential inflation crisis, and what steps should I take to protect my investments?”

That is a great question – fortunately, for those of us for the future, there are a few solutions worth considering…

Today’s solutions for an uncertain tomorrow

If you’re planning for retirement, then managing inflation risk in your savings must be a priority to account for the economic consequences of high inflation. Otherwise, the inflation “tax that no one voted for” might rob you of a large chunk of your hard-earned nest egg.

We’ve analyzed and compared inflation-resistant investment options for you. Diversifying with assets that at least preserve your purchasing power can help you plan for future expenses. Prices will be higher, though ideally your purchasing power will grow at the same rate.

“Wealth preservation” is a prudent goal, but what about growth? There aren’t many assets that help protect from downside risk and offer growth potential… That’s one of the benefits of physical precious metals. Gold and silver both have historical track records as stores of value. During periods of economic turmoil, precious metals tend to outperform just about all other assets.

That’s why investors consider gold a safe haven investment that offers shelter against inflation as well as economic and political crises.

I have a friend who’s a passionate free-climber. He once told me, “Life should be a balance of adventure and relaxation. You’re either climbing or planning your next climb.” If your financial concerns are interfering with your balance of adventure and relaxation, that’s probably a sign that your finances are unbalanced as well. Consider diversifying your savings to the “point of indifference” – where you’re confident that, no matter what happens in the economy, you’ll be able to sleep soundly.

Can physical precious metals can help with that? Take a moment to learn more here.

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