Feds top hawk morphs into flip-flopping dove to golds benefit

The controversy over the Brexit referendum in the United Kingdom has kept some of the spotlight off the Federal Reserves latest meeting, but the ramifications of its no-action vote on interest rates, as well as its ultra-dovish post-meeting statement, are starting to sink in.

In addition to cutting its short-term U.S. GDP forecast, the Fed also lowered the pace of its expected interest-rate hikes for the coming years.

And one speck in particular on the Feds so-called dot plot chart, in which the central bankers rate-hike projections are outlined, caught the eye of Wall Street.

Banker favors just 1 hike through 2018: While every other member projected at least one rate hike this year and gradual hikes over the next two years, these particular dots showed that a participant expected just one rate hike in 2016 and none in 2017 or 2018, Business Insider reported. Then, in the longer-run section that projects interest rates further out than three years, one dot simply disappeared.

That dot belongs to St. Louis Fed President James Bullard, who suddenly seems to be distinguishing himself as the biggest flip-flopper among an institution full of data dependent flip-floppers.

Just a few months ago the Feds top members were spewing a hawkish hard-line stance on interest rates, declaring the economy on the mend because of job and GDP growth. Chief among those hawks was Bullard, who warned in March that the Fed needed to raise rates pronto or risk causing devastating consequences in financial markets.

When asset bubble start, they keep going until they blow up out of control with devastating consequences, he said back then.

Signs of capitulation at the Fed: Now, though, the Fed is singing a markedly different tune, and Bullard is its new dovish poster boy. The upshot: Bullard now believes that one rate hike is enough for at least the next two-and-a-half years, Zero Hedge noted. At just a quarter-point, that would put the fed funds rate at only 63 basis points through 2018, if Bullards druthers prevail.

I think the first rate hike cycle is over, CNBCs Steve Liesman said in analyzing the Fed latest diagnosis. What has happened to the rate hike cycle is pretty profound. Its as close to the Fed getting to capitulation as Ive ever seen, about the efficacy of Fed policy, about the outlook for the economy.

Indeed, the Feds contradictory moves this week have prompted blistering rebukes from some major banks, including Bank of America Merrill Lynch and Citi.

Helicopter money in Feds toolbox: Other analysts observed that Fed chief Janet Yellen seems to be coming closer to former Treasury Secretary Larry Summers view that the global economy has entered a low-growth period of secular stagnation. With its rate-tweaking tool kit now nearly exhausted, the central bank could be lurching closer to unconventional policy tools such as negative interest rates and so-called helicopter money, in which the Fed creates money out of thin air for the government to disburse to citizens.

Yellen herself endorsed the latter idea at her press conference on Wednesday, saying, It is something that one might legitimately consider.

What is the Fed seeing in the U.S. economy that might legitimize the use of these potentially dangerous tools? Just look at a few recent headlines from some high-profile news organizations and blogs:

  1. More Americans see economy worsening than at any time since 2013 (Bloomberg, June 16).
  2. Obama administration to revise GDP growth down 2% (Breitbart, June 16).
  3. The world economy looks a bit like its the 1930s (Bloomberg, June 16)
  4. 15 facts about the imploding U.S. economy that the mainstream media doesnt want you to see (The Economic Collapse blog, June 15)
  5. The jobs picture is getting even worse, Philly Fed says (CNBC, June 16)

The picture isnt pretty, and with the Fed likely to keep interest rates lower for much longer than anyone was expecting, gold remains a lifeboat for either 1) the deflation that the Feds monetary tools are now powerless to deflect (and might in fact be inducing), or 2) the inflation that economic laws tell us that such tools almost inevitably spark.

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