Janet Yellen and company pretty much followed the script during last week’s Federal Open Market Committee meeting, raising interest rates another .25 percent and signaling three rate hikes in 2018.
We tend to focus primarily on Federal Reserve actions, but it’s important to remember the Fed isn’t the only central bank game in town. While it nudges interest rates slowly upward, the European Central Bank is standing pat on economic stimulus. And there’s no indication that is going to change in the near future.
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The December Federal Open Market Committee meeting went pretty much according to scrip.
Analysts widely expected the Fed to raise rates by .25. It did. Analysts also expected the Fed to signal three more hikes in 2018. It did that too.
Gold went up, as we said it probably would, hitting a one-week high in the wake of the rate hike as investors “bought the fact.”
The Federal Reserve is widely expected to nudge interest rates up again this week. Most analysts agree that the specter of a rate hike is one of the primary reasons gold has slumped over the last several weeks. But are rising interests rates really bad for gold?
The short answer is no. At least not historically
Earlier this month, Mint Capital strategist Bill Blain warned that the bond bubble is about to burst.
A crash in the bond market would likely take stocks down with it, but there is another impact that is less obvious. It could have a huge impact on the United States’ ability to finance its massive debt.
As we reported last week, investors are in an era of “irrational exuberance.”
The US stock market is at all-time highs. Meanwhile, market volatility is at lows not seen since the 1990s. In an odd juxtaposition of seemingly contradictory points of view, investors realize the market is overvalued, but at the same time, they believe it will continue to go up. According to a Bank of Ameria survey, 56% of money managers project a “Goldilocks” economic backdrop of steady expansion with tempered inflation.
In an article published at the Mises Wire, economist Thorsten Polleit adds some further analysis and asks a critical question.
Credit spreads have been shrinking, and prices for credit default swaps have fallen to pre-crisis levels. In fact, investors are no longer haunted by concerns about the stability of the financial system, potential credit defaults, and unfavorable surprises in the economy or financial assets markets.
“How come?”
According to data compiled by the Chicago Fed, financial conditions have reached the loosest level in the US since January 1994. This despite Federal Reserve tightening over the last year.
On Nov. 10, the Chicago Fed National Financial Conditions index hit -0.93. As Peter Schiff pointed out in his most recent podcast, that was early on in the dot-com bubble. The Fed has been raising interest rates and talking about shrinking its balance sheet. Why is it that financial conditions are looser now then when rates were still at zero?
Peter said it’s because the Federal Reserve is way behind the curve.
Conventional wisdom holds that an interest rate hike in December will be bad for gold.
But will it?
There is actually evidence the opposite could be true.
There’s been a lot of focus on the Federal Reserve lately.
Earlier this month, the central bank launched efforts to shrink its balance sheet after years of quantitative easing. Most analysts also expect one more interest rate increase this year. Then there is rampant speculation about who will take the reins at the Fed when Janet Yellen’s term ends early next year. Many observers think Trump will pick a more hawkish Federal Reserve chair who will increase the pace of “normalization.”
But Peter Schiff has said ultimately the Fed doesn’t want to do anything to upset the status quo. And at this point, the central bank is between a rock and a hard place. It can normalize, which will ultimately pop the bubble, or it can continue with its easy money policies and wreck the dollar. Peter has said the Fed will ultimately sacrifice the dollar on the altar of the stock market.
In a recent article published on the Mises Wire, economist Ryan McMaken weighs in, arguing along these same lines. He says the Fed won’t do anything that will spook the markets. That means we can expect more “easy money.” But this raises a question – what happens when the next recession rolls along?
The price of gold has fallen four straight weeks, primarily driven down by anticipation of Federal Reserve monetary tightening. The kickoff of the Fed’s balance sheet normalization program and the expectation of rising interest rates have helped spark a dollar rally. But few people seem to be paying any attention to the pitfalls of quantitative tightening. In fact, the Fed’s policy to push interest rates higher could turn out to be a havoc-wrecking juggernaut.
