The Federal Open Market Committee released its latest statement on March 16, 2016.  While the Fed did not hike its key interest rate – the federal funds rate – it did alter expectations for 2016.

It is now expected that the Fed will raise its key rate only 2 times this year, as opposed to the previous projection of 4 times.

The Fed is saying that price inflation is tame.  And by judging from the CPI, the Fed is correct.  It just so happens that the latest CPI numbers also came out on March 16.

The CPI actually showed up as negative 0.2% for February from the previous month.  Year-over-year, the CPI is up 1%.  However, the median CPI is still coming in at 2.4% annually.

There are a few problems here though.  First, we shouldn’t have this desire for 2% inflation.  In a free market system, we would typically expect prices to gradually fall to reflect gains in productivity and technology.  Imagine how inexpensive electronics would be today if the Fed weren’t partially counteracting these great gains.

Another major problem is that the CPI is not reliable in judging consumer prices.  I still watch the CPI because it is useful to see trends.  It also gives us a look at the data that the Fed and other analysts are looking at.

But perhaps the biggest problem is that the low CPI numbers are giving the Fed – and us – a false sense of security.  The CPI does not take asset price inflation into much account, which is where the bubbles often form.

This is especially bad because it falsely leads us to believe that the Fed is not doing much damage.  If we don’t see skyrocketing prices (ignoring health insurance and certain asset prices), then the Fed must not be harming us much.

But rising prices is just one consequence of a loose monetary policy.  Price inflation has remained low due to a lack of bank lending, coupled with a high demand for money.  The high demand for money means a lower velocity.  Right now, I believe this is a reflection of continued fear amongst the American people.

The Fed had an extremely loose monetary policy from 2008 to 2014.  Prices may not have gone sky-high, but the damage is done.  It has misallocated resources.  When those resources eventually try to realign to actual market demand, the correction is going to be painful.

There has also been a major misallocation in terms of savings and investment.  While spending may not be as crazy as the peak of the last bubble, there is little doubt that it is distorted and that savings should probably be even higher than they are.  We need savings and investment in order to set the stage for new prosperity that is actually sustainable.

So the main problem here is that the Fed will have no trouble starting QE4, or whatever they will call another round of money creation.  They will not perceive price inflation as a great threat.

Price inflation can jump quickly in these types of situations.  You should be prepared for this.  I recommend at least 20% of your investment portfolio in gold and gold-related investments for this reason.  You can also add in a little bit of silver.