Desperate Fed Denies Involvement!

Desperate Fed Denies It’s Behind the Curve

Have you ever noticed that when someone repeatedly insists there’s not a problem, usually it means there’s a problem? A case in point is Federal Reserve Chairman Jerome Powell, who is desperate to convince you that the central bank isn’t playing catch-up after years of policy errors.

As you’re probably aware, the Federal Reserve recently reduced the federal funds rate by 0.5%, which some commentators are calling a “jumbo” interest-rate cut. Since 0.25% rate cuts are the norm, there must be a reason why the Fed would switch from no cuts at all to a “jumbo” cut.

We can point to the fact that there’s a presidential election coming up soon, so the timing of the central bank policy pivot is certainly “interesting.” At the same time, we can wonder whether Powell and the other Federal Reserve officials are in panic mode and hope to reverse course quickly without disrupting the economy and markets.

After all, it’s a common criticism that the Fed injected too much liquidity into the U.S. banking systems for too long after the COVID-19 crisis. This gave the major large-cap stock indexes a big boost, but having too much fiat money circulating throughout the economy was bound to have knock-on effects.

It’s also problematic when the Federal Reserve holds interest rates too high for too long. This leads to high mortgage interest rates and unaffordable housing conditions, along with exorbitant borrowing costs for start-up businesses.

On top of all that, people and families are deep underwater as they’re trying to pay off high-interest auto and credit-card loans. This, coupled with high inflation from an oversupply of liquidity, persisted for too long and it’s taking a toll on already angry voters.

Additionally, the unemployment rate has stayed above 4% for two consecutive months while the inflation rate remains higher than the Federal Reserve’s 2% target. Yet, Powell’s apparent strategy is to deny the problems and push an optimistic narrative, saying things like, “The U.S. economy is basically fine,” and, “The U.S. economy is in good shape.”

Is this what it looks like when the economy is “in good shape” and “basically fine”? Americans are effectively out of savings, with U.S. net savings as a percent of GDP by households, businesses, and the government having been negative for six consecutive quarters.

In addition, informed investors might question whether it’s safe for the Fed to pivot its monetary policy aggressively with a “jumbo” rate cut now. If the Fed’s restrictive policy is what supposedly defeated inflation, then wouldn’t a sudden swing in the other direction threaten a return to high inflation?

But then, the narrative will always take precedence over logic when the stakes are so high for career politicians and central bankers. It speaks volumes, though, that Fed Governor Michelle Bowman dissented against the majority of Fed officials who voted in favor of the “jumbo” interest-rate cut.

Dissent within the Federal Reserve at such a crucial time indicates that the central bank could be making a mistake to fix its previous mistakes. At best, over-correcting will just replace one set of problems with another.

You can’t really blame critics for thinking that the Federal Reserve is behind the curve and is now scrambling to prevent a hard landing in the economy. But once again, Powell’s short-term solution isn’t to actually solve the problem, but only to declare that there’s no problem at all.

In response to the widespread criticism that the Fed is playing catch-up with the 0.5% rate cut, Powell stuck to his script and stayed in denial mode. “We don’t think we’re behind. We think this is timely, but I think you can take this as a sign of our commitment not to get behind,” he asserted.

That’s not what real confidence sounds like, of course. Powell wouldn’t feel the need to mention “getting behind” if there wasn’t any merit to the criticism. Thankfully, you don’t have to believe any politicians or central bankers if you have gold in your portfolio.

The gold price increased nearly every day for four years in the 1970s. It’s poised for another rally in the mid-2020s, though two years of restrictive monetary policy and high bond yields prevented this for a while.

The “jumbo” rate cut is a clear signal that the era of high bond yields is quickly coming to an end. Powell can deny that the Fed is behind the curve, but your eyes aren’t lying to you and the central bank’s actions speak much louder than their words.

So, don’t hold your breath if you’re waiting for Powell and the Fed to acknowledge their mistakes. Instead, hold gold and diversify your portfolio with the best asset to combat counterparty risk and untrustworthy, unelected leaders.