• The Fed is aggressively raising interest rates to fight skyrocketing inflation
• Experts fear the increases will trigger a recession and stagflation
• Economic signs warning of recession are flashing

Runaway Inflation Leads to Aggressive Rate Hikes

Economists had once hoped inflation would cool off by this summer. Then Russia invaded Ukraine. Now, the economic outlook has darkened. Prices for gasoline, food, and other raw materials continue to rise.

The economy’s lingering struggles caught the Federal Reserve by surprise. In response, they decided to pursue aggressive interest rate hikes to curb inflation. Experts now fear the rapid increases could stall the economy and bring on a recession.

The Biden administration is giving the Fed a lot of leeway. They know there isn’t much else they can do. Some Democrats worry about killing growth in the middle of a midterm election year. But inflation is even worse for them politically. Recent polls show that price spikes are by far the top concern among voters. ¹

Experts Warn of Recession

Fed Chairman Jerome Powell said that they can tame inflation without collapsing the economy. He cited 1965, 1984 and 1994 as examples. However, history points to a recession. Since 1961, the central bank has raised interest rates to tame inflation nine times. Eight of those times resulted in a recession. ²

Larry Summers, the former US Treasury Secretary, accused the Fed of “wishful and delusional thinking.” He finds “absurdity” in the central bank’s forecast for inflation to rapidly cool off in a red-hot jobs market.

Summers previously warned that Fed policy put the US economy on a path towards stagflation. Stagflation is the toxic mix of weak growth and high inflation. It plagued the US economy in the late 1970s and early 1980s.³

Moody’s Analytics chief economist Mark Zandi said stagflation is a “low-probability” event. He said the Fed would do whatever it took to avoid it. This includes stopping inflation by crashing the economy. “If it looks like we’re going into stagflation,” Zandi said, “the Fed will push us into recession.”⁴

J.P. Morgan currently puts the odds of recession at roughly 30% to 35%. The historical average is about 15%.⁵

Recession Warning Sign Flashing

Yield curve inversions are when short-term bond yields exceed those of longer-term bonds. The spread between the 5-year and 30-year Treasury yields briefly inverted on Monday. This hasn’t happened since 2006. It flipped on fears that aggressive rate hikes would stunt the economy.

Yield curve inversions are rare. They are viewed as a good recession predictor because they reflect investor fear about the economy’s long-term prospects. Every recession in the past 60 years was preceded by an inverted yield curve. This is according to research from the Federal Reserve Bank of San Francisco.⁶

Preparing for Recession

The underlying economy could be strong enough to handle a few rate hikes. But with a 1 in 3 chance of a recession, it is best to be prepared.

Gold is proven to hold its value as the economy contracts during a recession. During the Great Recession, the Producer Price Index (PPI) for gold rose 2.6 percent in 2008. It increased 12.8 percent in 2009. Overall, between 2008 and 2012, the value of gold increased dramatically. Gold had a 101.1-percent surge in the PPI. It set a then record high of $1,917.90 an ounce in August of 2011.⁷

If you are interested in hedging against the likelihood of a recession, contact a precious metals specialist at AHG about a Gold IRA today.

Notes:
1. https://www.politico.com/news/2022/03/29/federal-reserve-recession-inflation-rates-00021119
2. https://www.cnn.com/2022/03/25/economy/recession-risk/index.html
3. https://www.cnn.com/2022/03/25/economy/recession-risk/index.html
4. https://www.cnn.com/2022/03/25/economy/recession-risk/index.html
5. https://www.cnbc.com/2022/03/28/bond-market-is-flashing-a-warning-sign-that-a-recession-may-be-coming.html?&qsearchterm=recession
6. https://www.foxbusiness.com/economy/recession-warning-flashes-red-yield-curve-inversion
7. https://www.bls.gov/opub/btn/volume-2/pdf/gold-prices-during-and-after-the-great-recession.pdf

• Fed Chair Powell promises bigger, faster rate hikes to combat soaring inflation.
• The Fed hopes for a ‘soft landing’ but history points to recession.
• Gold positioned to hedge against inflation and recession.

Powell Threatens Faster and Bigger Rate Hikes

After letting inflation grow at its fastest pace in 40 years, Federal Reserve Chair Powell is desperate. Inflation is now at 7.9%. Powell said the Fed may move much more quickly to get it under control. He is ready to raise rates faster if needed. He’ll also quickly withdraw Fed support from the economy if necessary.

“The expectation going into this year was that we would basically see inflation peaking in the first quarter, then maybe leveling out,” Mr. Powell said. “That story has already fallen apart. To the extent that it continues to fall apart, my colleagues and I may well reach the conclusion that we’ll need to move more quickly.”¹

Policymakers already raised interest rates by a quarter point last week. They forecast six more similarly sized increases this year. The goal is to squeeze the economy, slow consumer spending and loosen the labor market. Essentially, they want to slam on the brakes instead of just easing off the gas.

Asked what would keep the Fed from raising interest rates by half a percentage point at its next meeting in May, Mr. Powell replied, “Nothing.” They said they would make a supersized move if they thought one was appropriate. Experts predict the Fed will raise its key interest rate to more than 2 percent by December. ²

He said that the timing of settling into some new normal is ” highly uncertain.” In other words, they don’t how long inflation will last. Powell implied that rates won’t be determined by economic forecasts. Instead, rates will come down when actual prices come down. Until then, they will just keep raising rates.

Recession Likely

The Fed has put a damper on stock market traders. They are moving away from riskier assets. Raising rates hurts share prices if they tank economic growth or cause the economy to contract.

History is littered with examples of the Fed causing a recession in its attempts to rein in inflation. But Powell is hopeful that there can be a ‘soft landing’. However, the Fed is believed to behind the curve on solving this problem. As a result, the financial community has lost faith in them. They are betting on history over hope. ³

Gold prices held onto gains in the face of the news. Typically, if the Fed raises rates, gold prices go down. The idea being is if inflation is going down, people won’t seek a hedge against it. But global conflict, slowing growth, and rising oil prices are keeping the threat of inflation very real.

One of the best investments if the Fed does cause a recession – Gold. Gold is a safe haven in both inflation and recession.

The most recent recession occurred between 2007 and 2009. It was a brutal and long economic downturn driven by the housing crisis. The S&P 500 Index dropped 37% during that time. But what happened to gold? The price rose 24%!

The World Gold Council tracked the correlation between gold and the S&P 500 Index between 1987 and 2010. They found that in a recession, when stock prices are likely plummeting, you can expect gold to be moving the other way. ⁴

If you are interested in protecting your retirement fund from today’s inflation and tomorrow’s recession, you should contact America Hartford Gold about opening a Gold IRA today.

Notes:
1. https://www.nytimes.com/2022/03/21/business/economy/powell-fed-inflation.html
2. https://www.nytimes.com/2022/03/21/business/economy/powell-fed-inflation.html
3. https://www.axios.com/fed-chief-powell-supply-0222dcd7-224b-46e8-9ff9-2a523d7ad605.html
4. https://www.fool.com/investing/2017/07/01/why-investors-buy-gold-in-a-recession.aspx

• The Federal Reserve approved raising interest rates to fight soaring inflation.
• The US faces the fastest and largest rate increases in years.
• No guarantee inflation will be tamed but the economy may stall out.

Inflation Drives Need for Rate Increase

The Federal Reserve approved the first interest rate hike in more than three years. Six more rate hikes are scheduled for this year alone. The Fed says the aim of rate hikes is to tame runaway inflation.

Price increases are at their fastest 12-month pace in 40 years. The increases are made worse by clogged supply chains unable to meet renewed demand. Prices are up 7.9% year-over-year according to the Consumer Price Index. Gasoline alone has risen 38% in the 12-month period. ¹

The Ukraine war has just made inflation worse. The conflict spiked oil prices – which turbocharges inflation. The Russian invasion is going to have a negative impact on the US economy. The Fed stated, “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.” ²

When the Fed raises interest rates, the effects ripple throughout the economy. Mortgages, auto loans, and credit card rates become more expensive for consumers. Businesses also pay more to borrow the money they need to fund their operations or expand. That tends to make both consumers and businesses spend less. Which may then cool the economy and, hopefully, drive down the prices of goods and services.

The Fed acknowledges they missed the mark by calling inflation ‘transitory’ in December. Their original 2% target now looks ridiculous. They now estimate dramatically higher inflation and much slower GDP growth. Kiplinger’s predicts inflation will soon spike close to 10%. ³

How High and How Fast Rates Are Going Up

The policy making Federal Open Market Committee will raise rates by a quarter percentage point. This puts the rate in a range between .25% and .50%.

They are scheduled to raise rates at each of the six remaining meetings this year. And then three more hikes in 2023. And theoretically, no hikes in 2024. The Federal Reserve hopes by raising the rates incrementally, they won’t stall the economy.

Fed policy set the groundwork for this out-of-control inflation. Inflation was superheated by unprecedented levels of fiscal and monetary stimulus – more than $10 trillion worth.

Also, the Fed tried a new inflation policy in September 2020. They slashed rates to near zero and kept pumping money into the economy to keep it afloat during the pandemic. They agreed to let the economy heat up in the interest of a full and inclusive employment goal that spanned race, gender and wealth.

The Fed is not only going to raise rates. They are also going to unload the nearly $9 trillion balance sheet of mortgage-backed securities they bought during the pandemic. ⁴

Experts predict the most likely result of raising rates and dumping their holdings will be a major stock market drop.

The country now faces a few paths before it can return to normal. Either there will be double digit inflation, a recession, or, worse case scenario, both.

If you have retirement assets that you don’t want lose, the time to protect them is now. The Gold Ira from American Hartford Gold is the ideal vehicle to secure your retirement funds. Contact them to learn more.

Notes:
1. https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html
2. https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html
3. https://www.kiplinger.com/economic-forecasts/inflation
4. https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html

 

• Russia-Ukraine conflict and inflation fears increase demand for gold
• Goldman Sachs revised their gold price projections to new record levels

Gold Trading at Historic Levels

Due to current events, Goldman Sachs has pushed its gold price projections on the 6-month horizon to a record $2,500 an ounce. That’s almost $500 more than the previous record price set in August 2020.

Gold prices passed $2,000 an ounce for the first time in a year-and-a-half on Monday as Russia’s full-scale assault on Ukraine continued.

Gold surged again to trade above $2,070 this week.¹ Analysts are now predicting a sustained rise as further sanctions against Russia rattle markets. Investors are flocking to gold as the crisis worsens. Gold is seen as a safe-haven asset in times of market turmoil because it retains its value during a time of crisis. Goldman Sachs called gold the “currency of last resort”.

Gold Price Projections

Goldman Sachs updated their gold price forecasts due to the conflict, international inflation and the threat posed by rising interest rates.

The bank changed its 3-month horizon to $2,300 an ounce, from $1,950 an ounce previously.
The 6-month protection has moved to $2,500 an ounce, from $2,050 an ounce previously.²

Goldman is citing the demand for gold is coming from consumers, investors, and central banks. Everyone is seeking a way to shelter their wealth in the face of soaring inflation and a stagnating economy.

Stocks and bonds have been experiencing wild swings with dramatic one day drops since the conflict began two weeks ago. Bitcoin has also continued to be volatile, losing the ‘digital gold’ title previously bestowed on it by some investors.

The crisis is shaking a fragile global economy that was already struggling with inflation, supply chain issues and the remnants of a pandemic. Unfortunately, there seems to be no clear ending in sight for the conflict. So, while stocks keep dropping, informed investors are moving into the one commodity that is poised to keep increasing in value – gold. Learn how to protect your assets with a Gold IRA from American Hartford Gold. Give us a call today 800-462-0071.

Notes
1. https://www.marketwatch.com/investing/future/gold?mod=home-page
2. https://www.cityam.com/gold-surges-again-as-goldman-predicts-price-will-top-2500-this-year/

• The Fed is unsure of how the Russian invasion will impact the economy
• The Fed still plans to raise rates to tackle runaway inflation
• Those plans can change at any time based on current events

Effects of the Russian Invasion on the Fed

Russia’s invasion of Ukraine threw the Federal Reserve into chaos.

Fed Reserve Chair Jerome Powell said the near-term effects of war in the Ukraine on the US economy are “highly uncertain”. ¹ The invasion could pull Fed policy in opposite directions. Powell admitted that the events in Europe can both increase inflation and undercut growth.

Despite this uncertainty, the Fed still plans to raise interest rates to tame high inflation.

Inflation has already soared to 40-year highs. Russia’s invasion heightened anxiety about energy prices. It could also have broad repercussions for the global financial system.

The Fed believes that higher interest rates are justified. This is because of runaway inflation and an extremely tight labor market. Also, they think the economy can handle higher rates as the impact of the pandemic goes down.

They will also follow through on their plan to reduce their $8.5 trillion portfolio of government securities.

The Fed Lacks a Clear Path Forward

Their plans may change if the war grinds on. The Fed may shift priority to keep the global dollar market stable. But this would conflict with its aim to unload its asset holdings.

Powell gave no hint about how far or how fast the Fed will go to get inflation under control.

The Fed wrongly predicted the inflation rate. They also said supply chain issues have been “larger and longer than anticipated”. Inflation is now at triple the Fed’s 2% target. The current inflation rate surprises policymakers. They thought price increases would be temporary. ²

Interest rates are currently near zero. The central bank is expected to raise interest rates at its March 15 policy meeting. More rate hikes are expected throughout the year. The amount of the rate hikes may change. If oil prices push inflation even higher, than the Fed could choose to act more aggressively down the line.

The challenge facing the Fed comes as Americans are gloomy about the economy. Inflation is one of the most personal ways people experience it. It is weighing on President Biden’s approval ratings. The White House often touts evidence of a pandemic recovery. They point to strong job growth in 2021.They also talk about wage gains for lower-income workers. But inflation upends that rosy picture.

“With all the bright spots in our economy, record job growth, higher wages, too many families are struggling to keep up with the bills,” Biden said Tuesday during his State of the Union address. “Inflation is robbing them of the gains they might otherwise feel.”³

Fed uncertainty is eroding confidence in the institution and the markets. Investors are moving away from Fed connected securities and towards safe havens, like gold. The price of gold is hovering near record levels as the conflict drags on. The yellow metal seems to be the one thing everyone is certain about.

Notes:
1. https://www.reuters.com/business/feds-policy-pivot-track-despite-uncertain-impact-ukraine-war-powell-says-2022-03-02/
2. https://www.reuters.com/business/feds-policy-pivot-track-despite-uncertain-impact-ukraine-war-powell-says-2022-03-02/
3. https://www.washingtonpost.com/us-policy/2022/03/02/powell-testimony-inflation-fed/