Recently Fed officials have frequently released hawks that have led to gold leakage, but this is all empty talk? Don't listen to what they say, look at what they do, the Fed may eventually give in to it...
Over the past two weeks, gold has fallen by more than $100. Meanwhile, the dollar rose to a seven-week high on May 17. If you think this looks a lot like the Fed's move towards gold and the dollar during the height of its fight against inflation, then you're right. That's because Fed officials have stepped up hawkish rhetoric over the past few weeks, raising expectations that interest rates will remain at higher levels for longer.
But Michael Maharrey, SchiffGold.com, said the comments were just empty talk. The real question is, how will the Fed respond when the economy bottoms out?
Fed officials have been hawkish
Over the past two weeks, several Fed officials have made comments underscoring their determination to continue the fight against inflation and signaling that interest rates won't fall anytime soon.
Chicago Fed President Goulsby, who usually leans toward a dovish stance, said it was too early to talk about a rate cut. The more hawkish Atlanta Fed President Bostic said policymakers would not consider cutting interest rates until 2024. He also said he favors continuing to raise rates during recessions.
Bostic also stressed that getting inflation back to 2 percent was a "top priority," saying that "if we were to pay some price for it, we would certainly be willing to do it."
Cleveland Fed President Mester also took an aggressive tone, saying interest rates have not yet reached a level at which the Fed can remain stable. Richmond Fed President Barkin also said he was "relieved" by the further rise in interest rates. He said:
"I think the message sent in the last statement is optional, not necessarily a pause or a peak. I want to know more about all the lag effects, but I also want to reduce inflation. If more rate hikes are needed, I'm willing to do so. ”
New York Fed President Williams expressed a similar sentiment, saying:
"We're not saying we're done with rate hikes. If further tightening is appropriate, we will do so. ”
It all dovetails with the hawkish tone that Powell tried to set at his press conference after the May FOMC meeting. At the time, he stressed that the Fed is currently in a "data-dependent" mode and insisted that "no decision was made today to pause rate hikes." He also hinted that the Fed could raise rates further and that "we are prepared to do more if further tightening of monetary policy is necessary."
As we've seen over the past year or so, any indication that the Fed will continue to raise interest rates has boosted the dollar and weighed on gold. This was the case last week, when hawkish rhetoric from the Fed raised expectations that the Fed will raise interest rates in June.
At the same time, most economists surveyed by foreign media also said that they believe that even if there is a recession, the Fed will maintain interest rates at current levels at least until the end of 2023.
Don't listen to what they say, look at what they do
According to Maharey, all this is empty talk. He said it's really easy for Fed officials to say, "We're committed to curbing inflation," when the economy seems to be on a relatively solid footing." We will continue to raise rates even if the economy downturns. ”
The real question is, what exactly does the Fed do when there is a recession? Maharey believes that from past experience, the Fed will not stick to its position, and they will return to loose monetary policy to support the economy. They did this after the dot-com bubble burst, during the 2008 financial crisis, the 2018 stock market crash, and the 2020 pandemic.
The reason for the Fed's "hard-mouthedness" today seems to be that Fed officials and economists generally believe that the coming recession will be relatively mild. Indeed, after the May FOMC meeting, Powell still insisted that the Fed could achieve a "soft landing" while bringing inflation down to its 2% target.
Recent remarks by Michael Gapen, chief U.S. economist at Bank of America, represent mainstream thinking, stating:
"In our view, the Fed will not favor a mild recession, but will see it as an acceptable price to pay for bringing inflation down to target."
Maharé stressed that Gabon was speaking "moderately." The problem is that there is no reason to believe that the coming recession will be mild. If depression is proportional to prosperity, then we will face a terrible depression.
During the pandemic, the Federal Reserve and the U.S. government pumped trillions of dollars of stimulus into the economy. This is on top of the trillions of dollars pumped into the economy after the 2008 financial crisis. It has artificially kept interest rates low for more than a decade. This has created all sorts of misinvestments and economic bubbles.
Since last March, the Fed has pushed interest rates to their highest levels so far before the 2008 financial crisis. While inflation is still not close to its 2% target, it is bound to be a shock for an economy that relies on a low-interest rate environment. As the financial crisis continues, we have seen cracks in the system (referring to multiple bank failures). The Fed tried to cover this up with its bailout program, but it was only a matter of time before other (crash) events occurred.
Of course, everything seems to be fine with the economy at the moment, and despite some contraction in economic data, the labor market is still strong and consumers are still spending. Before a crisis, no one believed that there would be a crisis.
It's important to remember that the 2008 financial crisis occurred more than a year after the Fed stopped raising interest rates. In fact, the Fed was already cutting interest rates at the start of the Great Recession.
So this brings us back to the most crucial question – what will Fed policymakers do when the question does arise? Do they have the courage to follow through on their tough words? Or will it give in as before? Maharé said:
"History tells us that they will eventually give in. Unless they can prove otherwise, there is no reason to think they won't. ”
Maharé believes that when faced with a crisis, they will almost certainly implement "temporary emergency measures" to maintain everything, which means cutting interest rates and restarting quantitative easing.