50 or 75 basis point rate hike later this month?
Just released minutes from the Federal Reserve Board’s June meeting which saw the Fed’s key policy rate hiked by 75 basis points (3/4 of a percent) show the Fed remains concerned about entrenched inflation.
To no one’s surprise, the minutes foresee another Fed rate hike in late July: “Participants judged that an increase of 50- or 75- basis points would likely be appropriate at the next meeting.”
The Fed does not want to appear weak or to have already lost control of its reversal on inflation. A week ago, Chairman Powell repeatedly voiced an anti-inflation resolve: “The process is highly likely to involve some pain, but the worse pain would be in failing to address this high inflation and allowing it to become persistent.”
Even so, with the increasing likelihood that the US is already in or is entering a recession and with consumer spending slowing, the question is already being asked how long that resolve will last. Will the Fed raise the Fed Fund’s rate an additional 50- or 75-basis points this month? Or will it pause?
Fed watchers go carefully through the minutes of each meeting when it is released weeks after the fact, looking for clues. Here is what they found: “Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.”
We don’t find much to go on there. Most market participants seem to expect the larger Fed Funds rate hike. But we are always perplexed by what the Fed does and doesn’t do and we don’t mind admitting it. For example, during the recovery from the Great Recession, the longest expansion from a recession in history, one that lasted 128 months, the Fed kept gunning money and credit conditions along the way, even though doing so was utterly unnecessary, even by the standards of the Fed’s own Keynesian philosophy.
As a consequence, we will let others mine the minutes and parse official comments looking for a key to future monetary developments. We’re not much interested in the short-run trading momentum – except for our thanks that Wall Street has given us a great gold buying opportunity!
But for us, we see what the Fed has done and what must happen as a consequence. From 2007 as the Great Recession was getting underway, until today, Fed assets (reflecting its creation of made-up dollars, unbacked by anything) grew from $800 billion to $8.9 trillion. That’s an increase of 1,100 percent.
That’s a lot of made-up funny money. It means those dollars will buy far less down the road, including far less gold. And if the Fed raises rates much more, as it may, it will soon make the interest cost of $34 trillion in US national debt the next big crisis.
Buy gold and avoid all the hysteria. And the sure-fire dollar crisis.