Is it the moment weve all been waiting for? Last week Federal Reserve Vice Chairman Stanley Fischer noted something unusual: We may well at present be seeing the first stirrings of an increase in the inflation rate.
But on Wednesday, the Federal Reserve ignored Fischers comment and kept interest rates on hold, citing global economic and financial developments that continue to pose risks.
Whats more, it reduced its expectations of raising rates four times this year to just two. And despite Fischers take, it also lowered its inflation forecast to 1.2%, down from the 1.6% it predicted in December.
Systemic risks boost gold: The gloomy outlook, which saw the Fed cut its U.S. GDP target to 2.2% from 2.4%, sent gold soaring. After festering near $1,230 ahead of the meeting, the metal jumped about $30 and back above $1,260.
The Fed decision implies that economic growth is weak, Van Eck Associates fund manager Joe Foster told Bloomberg. A weak economy and the inability to have effective monetary policy creates all sorts of financial risks,risks in the banking system, risks to the economy, and those type of systemic risks are what gold rises on.
Key gauges see rising prices: But is the Fed missing the inflation boat? Not only is gold often an early indicator of inflation, but three major price indicators suggest that inflation is starting to take hold and at least inch toward the banks 2% target.
- Although the overall Producer Price Index (PPI) declined in February, the core measure that excludes food and energy prices rose 0.9% in the 12 months through February. That was the largest gain since July 2015 and followed a 0.8% increase in January, Reuters noted.
- Additionally, the most recent Personal Consumption Expenditure index (PCE), the Feds favored model, posted a core gain of 1.7% over the year.
- And the February core Consumer Price Index (CPI) showed a 2.3% advance over the year, its strongest annual gain since 2012, U.S. News & World Report noted.
Trigger for next recession: Even a foreign journalist, Ambrose Evans-Pritchard of Londons Telegraph newspaper, seized on the U.S. inflation picture in an article titled U.S. inflation rears its ugly head as global cycle nears danger zone, calling the nascent signs of inflation the trigger for the next global recession.
The Fed must acknowledge the uptick in the inflation stats in their statement if they truly are dependent on the data, wrote Peter Boockvar at The Lindsey Group.
Win-win for gold: Whatever the Fed does with interest rates this year, some analysts are seeing win-win scenarios for gold. If the Fed does nothing and says, You know what? Were not going to raise the rest of the year, it will crush the dollar and gold will go up higher, Bloomberg metals expert Ken Hoffman told the network before the Wednesday Fed meetings conclusion.
If they come out and say, Hey, were going to raise a bunch of times, the dollar will go a lot higher, yes, but then these goldbugs think thats going to crush the rest of the world. Look at China, who has spent a trillion dollars defending its currency, which it wants to get much weaker. A stronger dollar would put even more pressure on China, and who wants China going into the tank, and that makes people rush to gold, so the goldbugs think they win no matter what. Theyre looking at this as a big buying opportunity.
Hard to control inflation: One danger in the Feds decision to hold rates in place is that it might be misreading the potential for inflation caused by its decade of near-zero rates and massive amounts of quantitative easing. After all, the Fed has been a notoriously lousy economic forecaster.
And inflationary wildfire is nothing to play with. As former Fed chief Paul Volcker famously told the Economic Club of New York in 2013, All experience demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.
If the Fed is wrong about inflation in 2016 and beyond, just as it was wrong about the gravity of the subprime-mortgage crisis in 2007, the most prudent course of action is to get prepared with precious metals.