Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

When Will the Fed Throw in the Towel on Rate Hikes?

Interest-Rates / US Interest Rates Oct 26, 2022 - 10:02 PM GMT

By: MoneyMetals


The Federal Reserve finally stopped referring to inflation as “transitory” earlier this year and got serious about trying to control the painful rise in prices it has caused. Officials have jacked the Fed funds rate up by 3% since March.

Thus far they have been willing to inflict pain upon financial markets. The S&P 500 lost roughly 20% of its value since the end of March.

The aggressive tightening has also pushed the Federal Reserve note “dollar” higher relative to other major currencies.

Some of the pain inflicted by the Fed is being exported to Japan, China, and Europe. Other central banks have been slower to tighten monetary policy because economies there are even more fragile than in the U.S.

Lots of precious metal investors were betting on inflation. While they certainly got that right, in a perverse turn of events, it didn’t matter – at least not yet.

They didn’t anticipate Wall Street money managers, and the trading machines they oversee, would robotically focus on the dollar’s foreign exchange rate, and not the Consumer Price Index.

It appears higher paper gold and silver prices will have to wait for a trend reversal in the Dollar Index (DXY) or until speculators start worrying about actual inflation and reprogram their machines. The DXY probably won’t be headed lower until Fed bankers change course on monetary policy.

The timing of the Fed’s pivot is one of the central questions for metal investors. What conditions would allow the central bank to declare victory over inflation and take its foot off the brakes? Could a new emergency even more dire than exploding prices force officials to alter course?

David Brady, CEO of Global Pro Traders, recently shared his thoughts regarding a Fed pivot on Palisades Gold Radio.

He thinks there is good reason to expect lower CPI numbers not too far ahead. Commodity prices have fallen dramatically over the past year. Lower costs for lumber, grains and base metals could soon show up in consumer prices.

Retailers are also reporting too much inventory. They have been caught by falling demand and can be expected to start cutting prices.

If CPI numbers move lower, currency traders will be positioning for the Fed to ease off on rate hikes.

However, a change in Fed policy is perhaps more likely to be driven by a catastrophe in financial markets than by falling consumer prices. Brady says there are warning signals all over the place.

There is trouble brewing in the junk bond markets, which have served as a canary in the coal mine. Financiers are demanding much higher interest rates, if they are willing to lend at all to junk rated companies. As a result, defaults are on the rise. Some of the earliest signs of the 2008 financial crisis came from the markets for high yield debt.

To be clear, junk rated companies aren’t the only institutions with trouble selling debt. The crisis in confidence now extends to sovereign nations.

Central banks got away with being the marginal buyers of sovereign debt for years. They picked up the slack when other investors got their fill. It does not look like they can get away with becoming the only buyers.

The long-absent “bond vigilantes” finally showed up in England earlier this month. The market for UK government bonds collapsed after private bond investors went on strike. They didn’t care for a plan by the newly installed government, headed by Elizabeth Truss, to finance tax cuts with more borrowing.

Brits learned the hard way that deficits do still matter, when the bonds went no-bid. Government pension plans nearly collapsed overnight.

The Truss government fell last week.

What happened in England must have come as a shock to U.S. Treasury Secretary, Janet Yellen.

The former Fed Chair, and senior architect in the construction of the largest debt bubble in world history, finally began pondering whether the same trouble is possible here. She said, “We are worried about a loss of adequate liquidity in the [U.S. Treasury] market.”

The list of crisis events which could force a pivot is long and seems to be getting longer by the day.

President Biden just moved the Army’s Airborne Division into eastern Europe, drawing America closer to a direct confrontation with the Russians. China is threatening Taiwan.

The most contentious mid-term election since the Civil War will take place in less than a month. Credit Suisse may not succeed in its emergency efforts to raise capital. Etc., etc.

The Fed will be called on to pivot, one way or another. Officials would almost certainly prefer to do it after they can declare victory over inflation, but they may not have the luxury of time.

By Clint Siegner

Clint Siegner is a Director at Money Metals Exchange, perhaps the nation's fastest-growing dealer of low-premium precious metals coins, rounds, and bars. Siegner, a graduate of Linfield College in Oregon, puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals' brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

© 2022 Clint Siegner - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in