Will they? Or won’t they?
That’s the question on everybody’s mind. Will the Federal Reserve finally pull the trigger and hike interest rates at next week’s September meeting?
I’m about 50-50, maybe leaning slightly toward a hike. However, I don’t think it ultimately matters, because even if they do nudge rates up, I’m almost certain it will be a one-and-done tightening cycle.
And no. A rate hike isn’t bearish for gold and silver – as conventional wisdom would have you believe.
It’s Decision Time
I’ve been writing about the Federal Reserve’s Catch-22 for months. The Fed simultaneously needs to hike rates to keep price inflation under control and cut rates to support the debt-riddled bubble economy.
So, which will it choose?
It feels like we are about to find out.
The situation has come to a proverbial head. If Warsh hikes at this meeting, it could tip the economy into a full-blown crisis. But if he doesn’t, he risks appearing feckless and weak.
Historically, central bankers ultimately cave to the economy. We’ve seen it time after time. When there is even a hint of a crisis, central banks tend to step in with monetary easing – inflation or no. However, Federal Reserve Chairman Kevin Warsh has muddied the water by talking himself into a corner.
You see, the new Fed chair wants you to know he’s going to be tough on inflation.
He’s going to be super tough on inflation. He’s said it over and over again.
Think back to his Jackson Hole speech just a few weeks ago.
“The Fed’s price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target,” Warsh went on to emphasize that it’s the central bank’s job to keep inflation reined in.
“That’s our job, our mandate, and our charge to keep.”
Warsh pointed out that “price stability is not self-executing, nor is inflation necessarily mean-reverting.”
“It is the Fed’s job to deliver stable prices.”
This sounds like a man ready to hike rates to the moon.
Of course, talk is cheap. For all the jaw flapping, the Fed hasn’t done anything yet. So, is it just a lot of noise?
Based on the CME FedWatch Tool, traders are pricing in a 70 to 72 chance of a quarter-percentage-point rate hike next week.
I can appreciate their reasoning. Price inflation remains mired well above the mythical 2 percent target. Oil prices spiked again over the last few weeks, reigniting inflation fears. (An oil price shock isn’t really “inflation,” but most people think it is, so we’ll accept this as a rationale.) The August jobs report was solid, giving the central bank some wiggle room to argue the economy is good and can handle a hike.
And then you have Warsh’s reputation. Don’t underestimate the importance of the Fed chair’s image. He’s talked a good game, but he needs to prove that he’s willing to put his (our) money where his mouth is. It won’t shock me if he pushes hard for a hike just because he feels like he needs to establish himself as the tough guy in the room.
However, I can also make a strong case for the Fed holding rates steady.
Forty-trillion reasons, in fact.
It’s pretty tough to contemplate a higher rate environment when the U.S. government is $40 trillion in debt and needs the central bank to support its borrowing and spending. Economies dominated by a Debt Black Hole don’t do well with higher rates.
And everybody knows this. Of course, nobody will say it out loud. But I guarantee you they’re talking about it privately inside the hallowed halls of the Eccles Building.
Now, Fed people will claim they don’t consider fiscal policy when setting monetary policy. But I’ve heard that there are kids today claiming they’re cats. Doesn’t make it so.
And then there is the political pressure. President Trump threatened to cut off trade with every country that runs a trade surplus with the U.S. if the central bank doesn’t cut rates. It’s a rather absurd threat, but it has to have some impact, right? After all, Trump just hired Warsh.
If I’m thinking with a mainstream mindset, the arguments for holding rates steady outweigh those for a hike. The economy is far from “overheated.” CPI seems to be moving in the right direction. Raising interest rates can’t fix an oil price shock.
But I kind of agree with the consensus. I lean toward a rate hike, simply because Warsh doesn’t want to lose face. The European Central Bank just hiked, adding a little more pressure to the cooker.
Hike or Don’t; It Doesn’t Matter
Regardless, I don’t think it matters. Either way, we ultimately end up in the same place — a crashing economy, surging inflation, and interest rates at zero.
If the Fed hikes, I think it will tip the economy. It’s already on the edge. The debt bubble is bulging. Economic growth is stagnant when you factor out government spending. An economy addicted to easy money can’t function for very long without the easy money drug.
And do you know what central banks do when the economy gets shaky?
In my view, the most likely scenario is a hike with a pretty quick pivot back to rate cuts.
But even if they don’t hike, rates are still too high given the level of debt and the economy’s need for the easy money drug. We’re still on the path to an economic reckoning, and the money printing will continue.
In other words, all roads lead to more inflation.
That’s why my head spins every time I see a big gold and silver selloff after any news that supports the rate hike narrative.
I interviewed economist Daniel Lacalle yesterday, and he summed it up perfectly.
“If you sell silver and gold because there is a rate hike, then it’s because you don’t understand money.”
He went on to point out that if the Fed does hike next week, it’s telling you something.
“A rate hike is the evidence that the solvency of governments is being less and less credible. It’s also the evidence of persistent inflation. Persistent inflation means that the government is spending way too much, way more than what the private sector demands, and that it’s generating more units of currency.”
Gold and silver are indeed non-yielding assets. But that doesn’t make them inferior to a government bond.
“To think that it is better to buy the bond of an insolvent nation that gives you 5 percent relative to something that has proven to be a reserve of value, a unit of measure, and generalized method of payment, i.e., real money as gold is… In reality, what you should see is that if rate hikes are coming, it’s basically because the government is not going to give you real economic returns on it on their debt.”
So, the Fed will hike next week. Or it won’t. But no matter what it does, it can’t change the overall trajectory of the economy. It can’t erase $40 trillion in debt. It can’t make the world fall in love with the dollar again. It won’t change its planned policy of 2 percent annual currency debasement. Don’t get too caught up in this single Fed meeting. Keep your eye on the big picture.
Originally Published on Money Metals.