Now, in his second day of testimony, President Powell continues to address the extremely high level of inflation and the Federal Reserve’s effort to reduce it. Currently, core inflation is three times above the acceptable target of 2%, and the CPI inflation index is 8.6%.
Since the 1980s, inflationary pressure has not been as consistent and hot as it is today. While President Powell suggested that the Federal Reserve was well aware of the challenges ahead, they were prepared and able to bring inflation back to its 2% target. However, the facts speak for themselves, and these facts indicate that price increases have continued to accelerate over the past couple of months. The Fed’s prayers that some components of the supply chain issues begin to unfold this year have yet to be answered.
What lies ahead is an extremely aggressive Federal Reserve that has raised interest rates in the last three consecutive FOMC meetings, pushing the funds rate target to
1 ½ – 1 ¾%. Fed members, including Chairman Powell, have signaled that these rate hikes will continue and the magnitude will depend on the data. It is now widely accepted that the July FOMC meeting will result in another ¾% rate hike. This will likely be followed by another ½ percent rate hike at the September FOMC meeting.
According to Reuters, “Fed Governor Michelle Bowman said on Thursday that she supported a 75 basis point increase in July, followed by 50 basis point increases at “upcoming” subsequent meetings, a more aggressive path of interest rate hikes than most of their fellow central bankers currently contemplate.”
The intention is to bring basic interest rates vis-à-vis the fed funds rate to approximately 3.5% by the end of the year. Even if the Federal Reserve raises interest rates by 24% by the end of the year, it will be difficult, at best, to have a profound and significant impact on the current level of inflation.
The Federal Reserve lacks the ability to combat inflationary pressures based on supply-side issues. While many of the supply-side problems that emerged were based on pent-up demand after the pandemic, new problems such as the war in Ukraine and the lockdown in China due to Covid-19 cannot be impacted by any action by the Federal Reserve. .
President Powell acknowledged the limitations of the tools available to the Federal Reserve saying, “We don’t have precision tools, so there is a risk that unemployment will rise from a historically low level. A job market at 4.1% or 4 .3% unemployment is still a very strong job market.”
Unquestionably, a tighter monetary policy will lead to a recession. It’s not whether or not the United States will experience a future recession, but when that recession will occur and how deep that recession will be.
This spilled over into the precious metals markets, taking gold and silver sharply lower. As of 6:15 pm EDT, based on gold futures, the most active contract for August 2022 is fixed at $1,826.40. This represents a drop of approximately $12 from yesterday’s closing price in New York. Silver lost 2.3% and the September contract is currently fixed at $20.925.
As interest rates continue to rise, it will continue to put pressure on safe havens like precious metals, with one caveat. Interest rates need to be at least equal to the current level of inflation to have a profound and significant impact.
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