Might Federal Reserve Tightening Be Over For 2016?

The financial market volatility about which Blanchard and Company has warned is now here in spades in 2016, and its led to a considerable amount of rethinking in and outside of Washington. One interesting notion that some Federal Reserve governors have recently presented is that the U.S. dollars 15% to 20% appreciation (or even more, depending on the metric) in the past 18 months is about the equivalent, in terms of effects on GDP and inflation, of a rise in the federal funds rate of a full percentage point even after taking into account the dramatic fall in oil prices!

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With that realization setting in, the three to four interest-rate increases the Fed has signaled for this year likely will be reduced, especially if incoming economic data continue to suggest slow growth at best and begin to instill greater fear into financial markets. The Feds rate policy and its effect on the U.S. also carry serious political ramifications heading into the presidential election.

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Right now theres no telling what policymakers on the Feds Federal Open Market Committee will do, and they are likely not anywhere close to a consensus. At best, the economic forecasts and interest-rate projections of the FOMC are ultimately pure guesses, said then-Dallas Fed President Richard Fisher in a 2012 posting on The Wall Street Journals Real Time Economics blog.

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Those of us who lived through the 2008 financial debacle understand the importance of having a proactive plan to help overall portfolios limit their downside risk to pure guesses by the Fed. The collapse in the markets triggered a rush to safe-haven assets like gold, and intense demand and limited supplies energized an already-established bull market that saw the price peak at all-time nominal highs in 2011. Just as in 2008, if todays stock-market collapse continues, you likely will have a very short window in which to buy bullion assets at reasonable market prices. After that window closes, it will become much more expensive and difficult to help you safeguard your assets with gold.

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