Fed President Worried the Fed Risks a Repeat of the 1970s
Interest-Rates / Inflation Feb 26, 2023 - 12:20 AM GMTBy: MoneyMetals
Gold and silver markets drifted lower again this week as investors braced for additional Fed rate hikes to come.
On Wednesday, the Federal Reserve released the minutes from its latest policy meeting. Policymakers agreed on the need for additional increases in interest rates. They settled on just a 0.25% bump up at their last meeting. But some dissenters called for a larger 0.5% hike.
Since the Fed’s last move, incoming economic data is emboldening the hawks. A superficially strong U.S. jobs report combined with stubbornly high inflation readings suggest central bankers have more work to do.
Following the Fed's policy meeting earlier this month, Chairman Jay Powell declared that disinflation was taking hold. But since then, inflation indicators have shown the opposite -- that prices levels in the economy continue to come in high and continue to exceed most forecasts.
Federal Reserve Bank of St. Louis President James Bullard is casting doubt on Powell's call for disinflation to take hold. Bullard says monetary policy is not yet sufficiently restrictive. And in recent remarks, he warned that if the Fed is too soft on inflation, we risk a repeat of the 1970s.
James Bullard: Inflation's a pernicious problem, so it is a risk and it does affect... One of the lessons over the last two years is that everybody feels the effects of inflation. It's pretty much across the spectrum, so rich and poor, young and old, everybody notices. So, if we can't get this problem under control soon, we risk a replay of the 1970s.
In the '70s, the U.S. monetary policy did not act strongly enough to keep inflation under control. Let's hope that we get disinflation in 2023, but right now it came in hotter than we thought.
Of course, the 1970s was a difficult decade for investors. Bonds got clobbered while stocks suffered a severe bear market in real, inflation-adjusted terms.
Precious metals were the standout asset class of the 1970s, culminating in a manic run to record highs in gold and silver in January 1980.
We aren’t yet seeing that kind of outperformance take shape. Although demand for physical bullion remain strong, there is little speculative interest on the long side manifesting in futures markets or exchange-traded funds.
In recent weeks, traders have been more inclined to sell metals contracts.
Metals markets are entering oversold territory and may be due for a technical bounce in the near future. Whether that develops into a more sustainable breakout will likely depend on whether the Federal Reserve indicates it will be winding down its rate hiking campaign.
For now, gold and silver bulls will view any bad news on the economy as good news.
In news on the sound money front, both houses of the Mississippi legislature have voted overwhelmingly to exempt physical gold, silver, platinum, and palladium coins and bullion from state sales taxes. The bill now awaits the signature of Republican Governor Tate Reeves.
Mississippi is set to become the 43rd state to exempt sound money from state sales tax. A dozen other states are currently considering legislation to rescind sales or income taxes on precious metals transactions.
The more tax and regulatory barriers to broad public participation in physical gold and silver markets that are removed, the greater the surge in buying will be if a 1970s-style mania phase in precious metals ensues.
By Mike Gleason
Mike Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2023 Mike Gleason - All Rights Reserved
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