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Will we get Inflation?

March 05, 2019

Will we get Inflation?

So the Fed has gone from being hawkish a mere 60 days ago to dovish.....very, very dovish. Here are a few of the things Fed officials have stated since the mid December (paraphrasing):


  1. Interest rate increases are on hold for 2019 (down from 3 expected). We are at the peak of an economic expansion and the Fed Funds rate is between 2.25-2.5%. This doesn't give the Fed a lot of wiggle room if/when the economy weakens. Although they are desperately trying to keep the expansion going (What Fed official wants a serious recession on his/her watch???)
  2. QT (Quantitative Tightening) is on the table to end. So the paltry sales in 2018 of bonds the Fed held on its balance sheet and the continued sales it was making every month to drain some of the money in the economy after the 2008 crisis is coming to an end. I wouldn't be surprised if it ended already. The Fed's balance sheet holds about $3.8 Trillion of Treasuries and Mortgage backed securities (https://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1).  
  3. Fed will likely let inflation run "hot" to make up for periods of below target inflation (target = 2%). They will fail. If inflation starts to pick up appreciably, they won't be able to stop it easily, especially with loose monetary policy. Where are you Paul Volker?
  4. Fed officials are considering really extreme policy tools to keep interest rates low. By potentially capping yields. How do they do that? Buy up all the bonds that are being issued to keep the yields low. That will introduce distortions in the bond market (although I would say some bond traders may already say that distortions exist) and price discovery will be non existent, or at least very hard to discern. See this speech by Clarida on Feb 22. (https://www.federalreserve.gov/newsevents/speech/clarida20190222a.htm).
  5. The Fed has adopted a third mandate that they won't admit to either themselves or the markets. But we all know what it is. That they can't have the stock market go down appreciably. Just look at the December market sell off and the about face the Fed has taken since then. Enough said. It will be very difficult to be a market bear in this situation other than short term volatility. Saying that, if we get a recession this year and earnings for public companies tank, how do we prevent the market from selling off significantly? I don't have an answer to that. Unstoppable force meets the un-moveable object. 

So if the Fed won't let interest rates climb, buys lots of bonds, and is overly accommodative, we are likely to see inflation get well above what the Fed is comfortable with...not to mention that it will screw the little guy as wages won't keep pace. Bankers taking care of bankers. 

So what does this mean for gold? Despite the sell off we have experienced over the past 7-10 days, I am more bullish now on gold than I have been in a long time. 

Remember. Gold is an insurance policy. It's not a get rich quick scheme.