The Federal Open Market Committee (FOMC) met this week and released its latest monetary policy statement.  The Federal Reserve’s target range for the federal funds rate will stay between 5.25% and 5.5%.  This is the second meeting in a row where the FOMC did not change its target rate.

While the Fed is hoping this is a Goldilocks scenario (not too hot, not too cold), this isn’t the case.  On the one hand, the Fed fears losing control of the dollar through higher price inflation.  This could ultimately also mean a loss of control over interest rates.

On the other hand, the Fed fears a major financial crisis.  The Fed doesn’t want a recession, but the people at the central bank probably wouldn’t mind an ordinary recession as long as the major banks stay solvent and the bond market doesn’t blow up.

If the Fed had hiked rates more, this would have been more tightening in the face of an inverted yield curve.  If the Fed had lowered rates – which nobody expected to happen – this would have risked much higher price inflation and a bigger blowup of asset markets.

Therefore, the Fed just kept things the same.  It will let the economy come to the Fed instead of bringing the Fed to the economy.  In other words, the Fed will just react to economic news.  It is always reacting to what is in the rearview mirror.

The Inevitable Recession

I think Fed officials understand that a recession is coming.  Even those in the financial media are talking about the possibility, and they almost never predict a recession.  But if you want to be a contrarian, don’t think that there won’t be a recession just because the financial media is talking about a recession.  The contrarian take is that the recession will be far worse than what they are talking about.

The yield curve has been mostly inverted for all of 2023.  It has recently started to somewhat flatten, although the long yields are still less than the short yields.  It just isn’t as much.  But the recession doesn’t typically happen until after the yield curve normalizes after being inverted.

I don’t think most people understand the potential of how bad this could be.  The government is spending over $6 trillion per year with massive annual deficits well over a trillion dollars.  This will continue to get worse with higher interest rates on the debt that is rolled over.  It will continue to get worse as the Fed is paying higher interest rates to banks for their reserves.

The stock market is still a massive bubble.  Housing prices are still astronomical, with mortgage rates near 8%.  This whole thing has the potential to blow wide open.  Throw in some insolvent banks due to the higher rates, and we could be looking at a financial crisis that is even worse than 2008.

Protect Wealth First

I am still an advocate of the permanent portfolio, or something similar.  If we hit a bad recession, rates may fall back to near zero and bonds may actually do well.

If the Fed is essentially forced to go back to easy money to save the banking system, then gold may finally skyrocket with more money creation.  There is always the possibility too that stocks may do well again in such an environment.

Of course, it is also important to have some cash or cash equivalents on the sidelines, as sometimes that is the only thing that holds up in the short run in a recession.  Plus, right now, you can actually earn a decent rate of return on short-term Treasury bills and cds.

If we do get a deep recession and the major asset bubbles pop, it will actually be an opportunity for some people with cash on the sidelines.  It will be an opportunity to buy assets at a steep discount when everyone else is fearful.  This is always easier said than done, but it is good to know going into it.

Warren Buffett said to be fearful when others are greedy and to be greedy only when others are fearful.  On this, I believe Buffett was correct.  But you have to believe this and think about this before the fear hits.