• The Federal Reserve raised interest rates by another 0.75 percentage points to fight inflation
• The Fed has not ruled out higher rate hikes at future meetings, increasing uncertainty in the market
• The record pace of rate hikes is taking the US closer to recession and exploding national debt

The Fed Raises Rates – Again

When it comes to interest rates, it seems like the sky is the limit. The Federal Reserve raised interest rates by another 0.75 percentage points on July 27th. This is the fourth increase of the year, making it the fastest pace of tightening since 1981. The Fed had kept the rate pinned close to zero to ease the shock of the pandemic. The levels now match the peak of 2016-2018 tightening cycle.¹

The Fed is quickly raising rates to get inflation under control. Households are feeling the strain of costlier rent, groceries, and gas. The Fed has seen few reassurances that its souped-up rate hikes are working. Inflation in June notched a new peak, climbing to 9.1 percent compared with the year before.²

But wait, there’s more. A New York Federal Reserve survey suggests that price hikes aren’t over yet. The group predicts that prices will have risen approximately 6.8% from their current levels by June 2023.³

The Fed Plays Catch Up

The Federal Reserve waited too long to respond to early signs of inflation. Former Fed Chair Ben Bernanke said, “The forward guidance, overall, slowed the response to the Fed to the inflation problem.” Treasury Secretary Janet Yellen also acknowledged the misdiagnosis coming from her own department, and that of current Fed Chair Jerome Powell. “Both of us could have probably used a better word than ‘transitory,’” she said.⁴

Future of Interest Rates

The Fed is committing to bring inflation down to its target of 2%. It said that failing to get inflation under control and allowing it to become “entrenched” is worse than moving too aggressively.

The central bank is prepared to raise interest rates well into the second half of 2022. Economists are split on whether the Fed will raise rates by another 0.75 percentage points in September or downshift to a half-point increase. Economists think the benchmark rate must go from the current 2.5% to 5% to hit the Fed’s inflation goals.

“While another unusually large increase could be appropriate at our next meeting,” that will depend on the data between now and then, Powell said. Powell will likely avoid sending strong signals. He wants to keep the Fed’s options open for a half- or three-quarters point move in six weeks. Powell said they will make decisions on a “meeting by meeting” basis. This is leaving the markets guessing.⁵

Those guesses are taking different sides. Barclays predicted annual inflation will fall to 5.7% by December. Down from its current highs but still well above the Fed’s 2% target. Goldman Sachs and Barclays both expect the central bank to approve a half-point rate increase in September. They then believe the Fed will move back to more traditional quarter-point moves in November and December. Bloomberg Economics disagrees. They think there’s little chance that the Fed will slow down its rate hikes later this year.⁶

Effects of Interest Rate Hikes

Markets have switched to seeming to fear recession more than persistent inflation. Evidence of a slowing economy is already emerging. Initial jobless claims recently hit an eight-month high. Housing sales have slumped amid higher mortgage rates. Retail sales did increase last month. But they declined after adjusting for inflation.

Fed officials still maintain that a recession can be avoided. Powell said that he did not believe the economy was in recession. He cited a “very strong labor market” as evidence. He acknowledges that the path to avoiding a recession has narrowed. A Bloomberg survey of economists put the probability of a downturn over the next 12 months at 47.5%.⁷

Personal debt increases as interest rates rise. But so does government debt. Higher interest rates will drive US debt payments to record levels according to the Congressional Budget Office. The CBO found that the cost to the federal government to make just the interest payments on money already borrowed will rise to a record 3.3 percent of the nation’s gross domestic product by 2032. Under the CBO’s projections, paying off the nation’s debt will become the most expensive federal program. More costly than even Social Security or Medicare.⁸

The Federal Reserve is dead set on bringing runaway inflation under control. They are prepared to raise rates as high and as fast as they must. The Fed experiences the dangers of recession, depleted retirement funds and unpayable debt as numbers on a chart. But it will be individual Americans who live with the real consequences of their policy. Fortunately, there is a way to protect your retirement funds from the hazards of skyrocketing interest rates. A Gold IRA from American Hartford Gold is a safe haven for your assets. Contact us today to learn more.

Notes:
1. https://www.marketwatch.com/story/fed-hikes-rates-by-0-75-percentage-points-and-signals-more-hikes-coming-11658944875
2. https://www.washingtonpost.com/business/2022/07/27/fed-rate-hike/
3. https://www.cnbc.com/2022/07/27/how-the-federal-reserve-fights-inflation-through-interest-rate-hikes.html
4. https://www.cnbc.com/2022/07/27/how-the-federal-reserve-fights-inflation-through-interest-rate-hikes.html
5. https://www.bloomberg.com/news/articles/2022-07-27/fed-raises-rates-by-75-basis-points-to-double-down-on-inflation
6. https://www.usatoday.com/story/money/2022/07/27/fed-interest-rate-hikes/10150515002/
7. https://www.bloomberg.com/news/articles/2022-07-27/fed-raises-rates-by-75-basis-points-to-double-down-on-inflation
8. https://www.washingtonpost.com/business/2022/07/27/fed-rate-hike/

• Caused by high interest rates, a recession often sees dropping stock prices, collapsing businesses, increasing unemployment, and shrinking retirement funds
• Recession is especially difficult on pre-retirees due to lack of time to make up retirement fund losses
• Investors can prepare for recession by adjusting when they retire, building savings and investing in safe haven assets

Recession and Retirement

Skyrocketing inflation is punishing Americans with drastically higher prices at every turn. It’s also eroding people’s futures by reducing the value of their retirement funds. The Federal Reserve recognizes the dangers of inflation. Bringing it under control is now their top priority. The Fed is prepared to raise interest rates until inflation is tamed. Even if it means pushing the economy into a recession.

Recessions have several negative impacts on the economy. Financial markets drop. There is an increase in foreclosures and personal bankruptcies. There is also a decrease in consumer spending and business investment. Some businesses may be forced to close their doors. Others are forced to lay off employees. Unemployment numbers tend to go up during a recession.

A recession is hard for the economy overall. But it’s especially difficult for those who are about to retire or have recently retired. The five years before and after retirement are often referred to as the “fragile decade.” A recession during this period can have a serious impact on your retirement funds. It is harder to make up portfolio losses once you enter the fragile decade. And if you’ve started to draw on your retirement funds, the withdrawals combined with the market losses could deplete your account faster than you had planned.

Ideally, you should avoid selling off investments during a recession. When you sell an investment that’s lost value, you lock in your losses. The market will someday recover, and your investments will bounce back. However, near-retirees don’t have as much time to ride out the ups and downs of the market. It is more difficult for them to recover from any losses in their retirement plan. This why some people choose to postpone retirement. The hope is that working for a few more years allows you to make up for your losses.

By continuing to work, you can keep contributing to your retirement account. If you stop contributing, you’ll be doing so when prices have dropped. As a result, you won’t see the benefits when the market bounces back. You will also be able to delay your withdrawals.

Delaying retirement has potential benefits. However, it is not always an option. During a recession, companies tend to layoff pre-retirees first. People are forced to retire earlier than planned. A worst-case scenario emerges. Without a job, you stop contributing to your retirement fund. You need to tap into your savings earlier than planned. Plus, you’ll be making these withdrawals when your portfolio itself is taking losses. You are basically depleting your funds with very little chance of ever gaining them back.

Recession Proof Your Retirement

A recession is obviously bad for people in the fragile decade. While economists argue if we are officially in a recession, there are things you can do now to protect yourself.

Advisors recommend saving money and building an emergency fund. You should also pay off high interest debt, like credit cards. Perhaps most importantly, you should diversify your portfolio with recession proof assets.

Gold is an exceptional hedge against recession. Former Federal Reserve Chairman Ben Bernanke said, “The reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.” 1

Historic gold prices prove out its value during a recession. After rising 2.6 percent in 2008, the Producer Price Index for gold increased 12.8 percent in 2009 during the Great Recession. From September 2010 to September 2011, gold prices jumped a whopping 50.6 percent, due to the uneven recovery and volatility in the U.S. financial markets. 2

As part of the business cycle, a recession is all but guaranteed. All you can do is prepare for it. Especially if you are nearing retirement or are already retired. Call us about a Gold IRA to learn how precious metals can protect your wealth.

Notes:
1. https://www.bls.gov/opub/btn/volume-2/pdf/gold-prices-during-and-after-the-great-recession.pdf
2. https://www.bls.gov/opub/btn/volume-2/pdf/gold-prices-during-and-after-the-great-recession.pdf

• The Consumer Price Index increased to a 40-year high of 9.1%
• Though led by energy prices, inflation is making every sector more expensive for Americans
• Recession is more likely as the Federal Reserve is set to raise interest rates more aggressively

Inflation Hits a New 40-year High

Inflation defied expectations, again. The consumer price index increased 9.1% from a year ago in June. It was above the 8.8% Dow Jones estimate. That marked that fastest pace for inflation going back to November 1981.¹

The record high inflation is punishing millions of Americans. The Bureau of Labor Statistics said shoppers are paying higher prices for a variety of goods. Costs swelled for gasoline, groceries, rent and dental care.

Energy prices surged 7.5% from last month. They are up 41.6% from a year ago. Gasoline costs 59.9% more than it did last year. Food and shelter costs were up as well. This was the sixth straight month that food and shelter increased. In addition, rental costs had their largest monthly increase since April 1986. ²

Inflation has largely erased the strong wage gains seen in recent months. Real average hourly earnings decreased 1% in June from the previous month according to the Labor Department. On an annual basis, real earnings dropped 3.6%. ³

The average American worker has lost $3,400 in annual wages under Biden thanks to inflation.
Meanwhile, the average family in which both parents work has lost $6,800 in annual wages. Inflation has basically wiped out the federal stimulus money people received during the pandemic. The same stimulus that most economists hold responsible for inflation in the first place. ⁴

Today’s data seems to counter the idea that inflation may be peaking. What is worrying is that the sources of inflation are increasing. A Navy Federal Credit Union economist stated, “Though CPI’s spike is led by energy and food prices, which are largely global problems, prices continue to mount for domestic goods and services, from shelter to autos to apparel.”⁵

Gas prices have started to drop in recent weeks. However, economists warn that the situation might not significantly improve for some time. People will continue to struggle to afford essentials like housing and groceries. Oxford Economics projects that inflation will still be running at 7 percent by the end of the year.

Chris Zaccarelli, Chief Investment Officer of Independent Advisor Alliance, said, “This morning’s number is staggeringly high. It’s higher than expected and shows that inflation is going quickly in the wrong direction. It really pushes the Fed even further into the corner they’ve been operating in. They need to raise rates quickly and they need to raise rates by large amounts.”⁶

The Fed Forced to Respond More Aggressively

The Federal Reserve seems set to take an even more aggressive position. They have already raised borrowing costs by 1.5 percentage points. The Fed is expected to raise interest rates another .75 percentage points at their next meeting. The last .75 percentage point increase was the biggest hike since 1994. ⁷

However, traders now believe a full percentage point increase is on the table. About 38% of traders are now pricing in the chances of a 100-basis point increase later this month, according to the CME Group’s FedWatch tool. That is up from a 0% chance last week. ⁸

The Fed’s plan is to make it more expensive to borrow money and do things like buy a home or take out a car loan. The goal is to weaken consumer demand, leading to Americans spending less, and, eventually, prices dropping. Economists fear the Fed won’t stick their ‘soft landing’. Instead, they will crash the economy into a recession. Record interest rate hikes without results are eroding the credibility of the Fed.

Stocks fell following the data release. Since the Fed started raising interest rates in March, the S&P 500 stock index is down almost 9 percent. The Dow Jones Industrial Average is down more than 6.5 percent during the same period. It is down almost 16 percent since the beginning of the year.

Debt heavy technology stocks have been hit particularly hard. The Nasdaq stock index is down more than 10 percent since rates started going up. It is down nearly 30 percent since January. ⁹

Policymakers are short on solutions but long on blame. Inflation is rooted in multiple factors. They include clogged supply chains, outsized demand for goods, and trillions of dollars in Covid-related stimulus spending.

White House officials have blamed the uptick in prices on Russia’s invasion of Ukraine. However, inflation was already moving aggressively higher before that attack in February. The administration also blames “greedy corporations” for using the pandemic as an excuse to raise prices. And yet, after-tax corporate profits have increased just 1.3% in aggregate since the second quarter of 2021, when inflation took hold.¹⁰

The causes of inflation aren’t showing any signs of relenting. The Federal government is revealing how powerless it is to bring inflation under control. Investors should take the initiative to protect their wealth while they still can. A Gold IRA from American Hartford Gold can shield your retirement funds from runaway inflation. Contact us today to learn more.

Notes:
1. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html
2. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html
3. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html
4. https://www.foxbusiness.com/politics/average-american-worker-lost-3400-annual-wages-under-biden-inflation
5. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html
6. https://www.reuters.com/markets/us/view-hot-us-june-cpi-turns-up-pressure-fed-2022-07-13/
7. https://www.foxbusiness.com/economy/inflation-surges-june-hitting-new-40-year-high
8. https://thehill.com/policy/3557459-five-takeaways-from-the-stunning-inflation-numbers/
9. https://thehill.com/policy/3557459-five-takeaways-from-the-stunning-inflation-numbers/
10. https://www.cnbc.com/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html

• The first six months of 2022 were dismal for the global economy
• This has been the worst start to a year for stocks in more than 50 years
• The second half of the year promises to be worse with soaring inflation, high interest rates, and recession

A Terrible First Six Months

The good news is that a miserable first half of the year is over. The bad news is that the second half looks like it’s going to be even worse.

A long list of economic crises is battering the economy. Uncertainty is at unprecedented levels. The Ukraine war persists. Covid 19 is wreaking havoc in China. Global supply chains are still snarled. Inflation is at an unrelenting 40 year high. Central banks are tightening monetary policy. Recession fears are growing. As the economy teeters, markets have tanked. The first half of 2022 was historically dismal for global stock markets. Analysts think the future isn’t any brighter.

This has been the worst start to a year for stocks in more than half a century. The NASDAQ has fallen by 30%. The S&P 500 closed out its largest first half decline since 1970. It is down over 20%. Both indexes are in bear territory. The Dow Jones Industrial Average is down over 15%. Bonds have had a terrible 6 months as well. This is a worrying sign since they are so closely tied to economic health. Whipsawing stock prices reflect how nervous investors have become. ¹

The Next Six Months Don’t Look Better

Deutsche Bank economists say it is “plausible” for the stock market to fall 35 to 40 percent from its January peak. This means that the current decline is only about halfway finished. Morgan Stanley also said there could be more downside ahead. According to them, a recession could send the S&P 500 more than 20% lower to 3,000 this year. In addition, Morgan Stanley points to falling bond yields as another indicator of an incoming recession. ²

It all began with a revelation from a Fed meeting on January 5. Data showed that Inflation was rising quickly. It posed a major risk to the economy. Interest rates would have to rise sooner than planned. And just like that, the era of red-hot stock prices fueled by cheap money ended. Aggressive interest rates to curb inflation dramatically altered the economic landscape.

The Federal Reserve’s determination to tame inflation by raising interest rates is a major factor in the current market turmoil. Jerome H. Powell, the Fed chair, said on Wednesday that the central bank’s efforts to fight inflation were “highly likely to involve some pain.”³

HSBC’s global chief strategist says the days of low inflation and low interest rates are behind us. He forecasts a future with persistent high inflation, increased interest rates and more volatile economic cycles. HSBC believes additional new reasons will fuel inflation. Deglobalization, climate policy and a commodity super cycle will push prices up across major economies. The bank believes we might be at peak inflation, but it won’t start declining until the end of the year. They advised that clients “will need to think harder about diversification and portfolio resilience.”⁴

The Schwab Center for Financial Research stated that stocks are going to feel strong downward pressure. The pressure is going to come from the Fed’s tighter monetary policy, reduced liquidity, and slow economic growth. They advise that investors should prepare for more volatility. Companies will be reporting earnings in the next few weeks. Weak earnings and profit margins could prompt yet another market downturn. They emphasize the importance of diversifying with low-risk assets. Gold has traditionally been such a safe haven asset.⁵

The risk of recession is rising. A lot would have to go right for there to be a second half of the year market rally. Inflation would need to be under control. A recession would have to be avoided. The Ukraine war would have to reach a resolution. And company earnings would have to stay afloat. Achieving any one of them is a tall order. All four would be nothing short of miraculous. Barring any miracles, major money managers are advising to hedge against risk with safe haven assets. The Gold IRA from American Hartford Gold is designed to preserve wealth during economic downturns. Contact them today to learn more.

Notes:
1. https://www.npr.org/2022/06/30/1108787657/6-months-stocks-2022-economy-first-half-nasdaq-dow
2. https://www.nytimes.com/2022/06/30/business/stock-market-worst-start-50-years.html
3. https://www.nytimes.com/2022/06/30/business/stock-market-worst-start-50-years.html
4. https://www.cnbc.com/2022/07/05/h2-market-outlook-strategists-on-how-to-weather-the-market-storm.html
5. https://www.schwab.com/learn/story/quarterly-market-outlook

• Stocks, bonds and cryptocurrencies continue to experience epic drops in prices
• Gold has maintained its value in the face of runaway inflation, rising interest rates and the threat of recession
• Analysts and history point to gold prices continuing to rise as global uncertainty increases

Gold Stands Above the Rest

The global economy has been rocked by war, pandemic, inflation, and broken supply chains. As a result, stocks, bonds, and cryptocurrencies have all seen epic downfalls this year. The gleam of gold is the one shining light in the middle of it all. Gold remains solidly secure within its one-year average.

Major indexes have notched big declines in 2022 due to high inflation and rising interest rates. Growing concerns about corporate profits and economic growth have dented investor appetite for risk. The blue-chips are down 18% this year, while the S&P 500 is down 23% and the tech-heavy Nasdaq Composite has fallen 32%.¹

Gold prices are typically lowest in the June to August timeframe. The high for the year was $2,080 per ounce in March. The price rose because of Russia’s invasion of Ukraine. The low for the year was $1,780 in January. Right now, gold is hovering around the $1,800 mark. That price point is where the 52-week moving average lies. Historically speaking then, gold is surpassing expectations. ²

Gold prices were hemmed in a tight range on Tuesday. Prospects of higher interest rates challenged bullion’s safe-haven appeal while recession risks boosted it. Typically, rate hikes dim gold’s appeal by increasing the opportunity cost of holding the asset which pays no interest. “The yellow metal is being pulled in two directions as a hawkish Fed regime clashes with recession fears,” said TD Securities in a note.³

So it can be seen that gold is also doing exactly what it is supposed to: preserve its value and protect capital. Meanwhile, wealth held in securities continues to erode. According to Federal Reserve Bank data, Americans lost half a trillion dollars in wealth in early 2022. ⁴

Gold is holding its own even as the U.S. dollar gains in strength. A rising dollar usually lessens bullion demand from overseas buyers. Gold is actually doing better against other currencies. It is not far off its all-time highs against the pound, the yen and the euro. Analysts predict that as those currency markets are tightened to fight inflation, the dollar will drop. As the dollar drops, the price of gold is expected to go higher.

Gold Forecasts

Goldman Sachs has upgraded their year-end gold target to $2,500 an ounce. In their report, the bank stated that threats of recession would lead to higher gold prices. It also believes that the risk of inflation is likely a strong factor to influence gold prices this year. Goldman has said that inflation expectations may become “unhinged.” Inflation has become far from transitory as the Fed once predicted.

The Goldman report also said that in any scenario where inflation increases rapidly and sustainably, gold will likely outperform other assets. The report stated this is because gold is a physical asset with no liabilities. Its value cannot be eroded by inflation like other assets such as bonds and equities.⁵

War, soaring inflation, a looming recession, and the specter of stagflation are recalling images of the 1970s. While everything looked grim then, gold had one of its best decades. It went from $35 an ounce in 1971 to $850 an ounce in 1980.

The global economy is wracked with challenges. There is out-of-control inflation, geopolitical instability, and escalating de-globalization. Around the world, leadership is losing the faith of the people as their failures mount. All of these conditions are driving investors to gold. The precious metal continues to prove itself as a store of wealth in all the uncertainty. A Gold IRA from American Hartford Gold can deliver the peace of mind that safe haven assets offer. Contact us today to learn more.

Notes:
1. https://www.wsj.com/livecoverage/stock-markets-today-fed-rates-06-16-2022#:~:text=Major%20indexes%20have%20notched%20big,Nasdaq%20Composite%20has%20fallen%2032%25.
2. https://moneyweek.com/investments/commodities/gold/605038/gold-has-been-incredibly-boring-to-own-but-thats-no-bad-thing
3. https://www.cnbc.com/2022/06/28/gold-markets-russia-dollar-treasury-yield.html
4. https://www.cnn.com/2022/06/09/economy/americans-wealth-stock-market-housing/index.html
5. https://www.kitco.com/news/2022-06-29/Goldman-Sachs-raises-its-gold-price-forecast.html