On Wednesday, January 27, 2021, the FOMC released its latest statement on monetary policy. It came as no surprise that the Fed is holding its target federal funds rate near zero.
The statement says: “The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world.”
No. The government lockdowns and restrictions, along with previous monetary policy, are causing tremendous human and economic hardship.
It wasn’t COVID-19 that shut down hundreds of thousands of small businesses across the country in 2020.
The statement also says: “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.”
I also heard Powell refer to this in his press conference. The Fed no longer just wants to get to 2 percent inflation (by their measure). The Fed wants to go above 2 percent inflation to make up for previous inflation (by their measure) that ran below 2 percent.
This makes absolutely no logical sense except that the Fed wants to be able to run higher inflation numbers than its original stated goal. Why would you have to make up for inflation that didn’t happen several years ago? I mean, there was double-digit inflation in the 1970s, so maybe we should have some deflation now to make up for that.
The only reason for this newly stated goal is to provide cover when inflation (by their measure) exceeds the 2 percent target but they still need to help fund deficits and bailouts. It is hard to send stimulus checks and bail out the whole country while having to keep inflation at just 2 percent.
There isn’t going to be any slowdown in spending by Biden and the Democrat-run Congress, or at least not if they can help it. There are a lot of special interests and lobbyists in Washington DC to take care of.
The Fed’s Balance Sheet
The Federal Reserve’s balance sheet continues to grow. It has slowed down from its unprecedented rise in March, April, and May of 2020. But it’s hard to go up a trillion dollars per month every single month.
The FOMC statement says: “In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
I’m not sure if we are on QE4 or what number we’re on now. It’s hard to keep count.
Even after the unprecedented rise last year, the Fed is still continuing to add at least $120 billion in new money every month. This is so unbelievable, it almost makes it sound rational that stocks and real estate have boomed in the face of a massive recession.
Interest rates, while ticking up a little, still remain near historical lows. I believe this will continue until we see stronger signs of consumer price inflation.
Based on the political madness and the monetary policy madness, I am still a strong advocate of owning gold and gold-related investments. I think owning actual gold, gold certificates, and gold ETFs are the safer play. I think mining stocks will continue to be volatile, but there is potential for extraordinary returns there.
Even if we see the stock bubble finally collapse, I don’t think gold will go down that much. And any down moves will be temporary, as the Fed’s only solution is to create even more money out of thin air.
If confidence in the U.S. dollar starts to erode, then gold will rise quickly. I expect we will eventually see a gold bubble too, but that is likely years away.
In percentage terms, the price of gold in dollars has gone up less over the last year than the Fed’s balance sheet. Think about that. And the Fed is going to continue to expand by at least $120 billion per month.
Financially speaking, there are two major events to prepare for right now: a popping of the stock market bubble and massive inflation.
We already have massive inflation in monetary terms. But I expect we will eventually see massive price inflation. Before that happens, I expect we will see a major drop in stock prices.
As the Fed said, there is “tremendous human and economic hardship across the United States and around the world.” Unfortunately, the Fed is only contributing to this hardship, and things are going to get worse before they get better.