As the Federal Open Market Committee meets again this week for its decision on interest rates, its decision is basically a foregone conclusion. No one expects the FOMC to cut rates this week, as Wall Street\u2019s hopes of a rate cut have been pushed out to June or July.<\/p>\n
But what will be watched closely is the summary of economic projections that will come at the end of this week\u2019s meeting. Wall Street will be looking for clues to determine whether Fed officials might be becoming more comfortable with the idea of rate cuts in the near future.<\/p>\n
Fed Chairman Jay Powell has stated that the Fed won\u2019t start cutting rates until inflation shows consistent movement back towards the Fed\u2019s 2% target. But with inflation above 3% and showing signs of slowly rising, the case for Fed rate cuts seems to be weakening.<\/p>\n
Even with signs of weakness in consumer spending, and an unemployment rate that has increased slightly, inflation is still first and foremost in the Fed\u2019s mind, and for good reason.<\/p>\n
On the one hand, the Fed wants to make sure that the economy doesn’t fall into recession before the election, and is likely under pressure from the Biden administration to start cutting rates in order to juice the economy and deliver a recession-free economy in November.<\/p>\n
On the other hand, the Fed has to balance that with the risk of shooting inflation higher than it already is. High inflation has been the hallmark of \u201cBidenomics\u201d for most American households, and higher inflation by November would likely cause most Americans to remember how badly they have fared under Biden.<\/p>\n
Americans have already faced a fair amount of pain at grocery stores, gas pumps, and when looking for houses. If inflation were to shoot up to, say, 5% by election time, there\u2019s a strong possibility that disaffected voters may take it out on Biden.<\/p>\n
The Fed therefore has a very difficult path to weave, having to both ensure that the economy stays sound and healthy and that US consumers start feeling some relief from inflation. Can the Fed do it?<\/p>\n
Wall Street has been pushing for rate cuts for some time now, and the expectation that the Fed will at some point in the near future start cutting rates has led to optimism among markets that is probably unwarranted.<\/p>\n
In December the first rate cuts were expected at this week\u2019s meeting. But as successive inflation reports have come in showing that inflation isn\u2019t dropping like the Fed wants it to, those expectations have been pushed back ever further.<\/p>\n
As it appears that inflation is going to be far tougher to get back to 2% than first thought, will the Fed be able to do enough to get inflation back to its target rate? Getting tough on inflation is likely going to require further rate hikes and even more restrictive monetary policy, something that the Fed doesn\u2019t want to do.<\/p>\n
So we\u2019re likely going to see that inflation sticks somewhere in the 3-4% range, at least until the Fed decides that it\u2019s going to cut rates. And once it does decide to cut rates, inflation could start taking off again.<\/p>\n
At this point there isn\u2019t much economic data that would point to the need for a Fed rate cut. Expect the first rate cut to take place as a reaction to some sort of negative economic data or indication of an oncoming financial crisis or recession.<\/p>\n
If a major bank fails, for instance, that might spur a rate cut. Or if consumer spending suddenly craters, or the job market suddenly starts posting major job losses, that too might spur rate cuts.<\/p>\n
Until then, however, expect the Fed just to sit around and wait to see what happens with inflation before it makes a decision one way or the other on interest rates.<\/p>\n
If there\u2019s one takeaway from the Fed\u2019s actions, it\u2019s that inflation will stick around longer than most people had expected, and it could even get worse. If the Fed decides to start cutting interest rates, for instance, or if it returns to quantitative easing to overcome bank failures or a slowing economy, inflation could start rising even more significantly than it is now.<\/p>\n
Anyone who hasn\u2019t already taken into account higher than usual inflation for the next several years probably should. The days of 2% or lower inflation are behind us, and it might be a while before we ever see them again.<\/p>\n
That makes it important to ensure that your financial assets are protected against inflation, and that you\u2019re able to grow your assets in such a way that you make real returns after accounting for inflation.<\/p>\n
One asset that many people trust as an inflation hedge is gold, which has served as a safe haven asset and hedge against inflation for centuries. Gold tends to maintain its purchasing power over time, unlike the dollar which loses value against inflation.<\/p>\n
Since 1971, the dollar has lost over 87% of its value, while the price of gold has increased over 6,000% since then. And during the stagflation of the 1970s, when inflation rose into double digits, gold\u2019s annualized price gains over the course of the decade were over 30% per year.<\/p>\n