3 Things You Should Know About A Warsh Fed

The Senate confirmed Kevin Warsh to be the Federal Reserve’s 17th chairman, replacing outgoing Chair Jerome Powell. Mr. Warsh is stepping into a role widely considered to be the most powerful central banker in the world, some even say the most powerful person in the world.

However, the Fed Chair is often in the background and some Americans may not even know his name. Yet, decisions he makes will impact your everyday purchases, the U.S. economy, the stock market and gold. Here’s three things investors should know.

Warsh was confirmed by a narrow vote along party lines.

Senators voted 54-45 to confirm Warsh as Fed Chair. This is the narrowest margin since 1977.

Why this matters:

This reflects how tensions with the White House have tugged the central bank into the fray of politics. The White House has repeatedly called for lower interest rates over the past year. Meanwhile, the Federal Reserve is supposed to be an independent body, in order to allow it to make hard decisions to protect the jobs market and to keep inflation low.

Earlier this year, the Justice Department launched a probe into the Fed over an expensive building renovation project at the central bank. Outgoing Fed Chair Powell was served with grand jury subpoenas that threatened a criminal indictment. Critics called this a pressure campaign to intimidate Powell into cutting interest rates. Bottom line? Warsh wades into a Fed that has seen a fair amount of drama and discord in recent months.

In this environment, gold continues to benefit as a neutral, independent safe-haven investment that is not tied to any government or central bank.

Warsh begins his term as inflation is running hot and rising.

In April, the consumer price index jumped 3.8%, as the ongoing U.S. war in Iran dramatically boosted energy prices. In April, producer prices soared 6% year-over-year, suggesting there is more inflation in the wholesale pipeline that will soon hit the consumer level even harder.

Why this matters:

Inflation is well above the Fed’s 2% target rate and rising. Typically, the Fed combats rising inflation with higher interest rates. Indeed, in the current environment, the president of the Boston Fed said recently she saw a need for rate hikes. But, that flies in the face of what the White House has been saying for months. President Trump said last month: “We should have the lowest interest rate in the world.” Warsh will face ongoing pressure to lower rates from the White House, while attempting to navigate an inflationary economy.

In this environment, gold continues to benefit as a long-term inflation hedge. As the U.S. dollar is devalued by inflation and money printing, gold is in a long-term uptrend that helps investors retain and grow their purchasing power.

Warsh faces questions about central bank independence.

During his nomination hearings, Warsh emphasized the importance of the Fed’s independence. But, given the recent pressure campaign from the president, there will be scrutiny on whether Warsh can resist political pressure to lower rates.

Why this matters:

If Warsh is perceived to be bowing to political pressures to lower interest rates while inflation is high, it will hurt long-term inflation expectations. And that’s supportive to gold. If Warsh manages to execute lower interest rates soon, while inflation is still high, that will also weaken the U.S. dollar and will be gold-supportive.

Big Picture? It’s Supportive to Gold

The new Federal Reserve Chair faces one of the most challenging economic and geopolitical times since the 2008 Financial Crisis. Today there are over 130 armed conflicts raging around the globe. The U.S. is waging war on Iran, which has currently closed the Strait of Hormuz and nearly shut down 20% of the world’s oil tanker traffic. A global energy supply shock is underway, which has already sent gas prices at the pump to over $5 a gallon in many parts of the U.S. The longer the Strait of Hormuz is closed, the longer energy prices will remain high, which will boost consumer prices throughout the American economy.

Gold gains support from many scenarios in a Warsh Fed. If inflation expectations continue to rise, that’s supportive for gold. If long-term interest rates are expected to fall, that’s supportive for gold. If the Fed’s independence is questioned, that’s supportive for gold. If pessimism about the economy and the macro stress in the world continues, that’s supportive for gold.

While we Americans face an uncertain economic future, we can control with certainty our own individual investments and portfolios. There’s never been a better time to secure your financial future with an increased allocation to precious metals. Inflation is rising, which eats away every single day at the purchasing power of your paper money. Trade your paper money today for precious metals—a proven asset with a 5,000 year track record that can’t be eroded by government policies or inflation.