The last day of the week evolves successfully for precious metals. Gold rose 0.66% to just over $1,814 an ounce (at press time). This is the highest price for gold in the last 2 1/2 weeks, with gold breaking the psychological threshold of $1,800 per ounce. In the case of silver, the increase was briefly even higher, by 0.75%, reaching $22.66 per troy ounce. Over the weekend, it felt just below $1800 an ounce, and at the beginning of the trading week the price of gold is stable.
Thus, the precious metals continue their rally that started after the meeting of the Federal Open Market Committee (FOMC) of the Federal Reserve, which took place on Wednesday this week. After it ended, gold rose by 2.7% and silver by 4.7%.
The central bank’s latest meeting also sent the main stock indexes down. Since its high on Dec. 15, the Nasdaq has fallen 2.72%, the S&P 500 has lost 2.48% and the Dow Jones is down 2.1%.
Bitcoin has fallen by as much since Wednesday afternoon, although it had initially risen 5%. At the time of writing, bitcoin is trading at $45.8k. Ethereum, however, rose slightly over the same period, up 0.9% to $3.7 thousand.
The US central bank kept its key interest rate range between 0% and 0.25% and announced that it will reduce its quantitative easing program from early next year. The new horizon for its termination is March 2022, instead of June as originally announced.
In addition, Federal Reserve Chairman Jerome Powell has stated that he expects full employment next year. If that happens, he expects 3 interest rate hikes.
First, the condition set by the central bank is serious. In his statement we read that:
Given inflation, which has already been above 2% for some time, the Committee expects that it will be appropriate to keep the target interest rate unchanged until labor market conditions reach levels that the Committee considers compatible with full employment for work.
It is not yet clear whether we will see a continued decline in unemployment given the emergence of new variants of the coronavirus.
Second, there is a huge difference between rising interest rates and rising inflation. Yes, the central bank could raise interest rates by 0.25 percentage points, reaching 0.75-1% by the end of 2022. Thus, it will claim that it is “fighting inflation” and that it is following the previously announced plan.
But this will fail to stem inflation, as yields on many assets will remain in negative territory. To moderate today’s price hike and dollar collapse (in absolute terms, not relative to other currencies, which are depreciating even faster), the central bank will need to raise rates significantly more. In the 1980s, Paul Volcker raised the base rate to an unprecedented value of more than 20% to control an annual increase in the consumer price index of 12%.
But such a thing is quite impossible nowadays. If we go back just 3 years, we will see that raising the base rate to 1.5%, which is an extremely low level from a historical point of view, led to a stagnation in the stock markets. This is why the Federal Reserve had to cut it again in 2019, that is, before the pandemic.
If the central bank raises interest rates, the US economy, which has a record level of debt, will implode. Therefore, even if there is an increase, it will be negligible and will not represent a real confrontation with inflation .
The Federal Reserve Is Losing The Battle Against Inflation In Advance
The central bank knows this. That’s probably why they’re not facing the problem now, even though the consumer price index rose in November at the fastest pace in nearly 4 decades. There is nothing to suggest that we won’t see similar increases in December or in 2022.
It is clear from all comments by the Federal Reserve that they will face inflation, but sometime in the future. He always leaves a lot of loopholes to avoid facing the situation. The current state of the labor market is uncertain because there is no concrete definition of “full employment”. So the central bank can always claim that market conditions have not met the criteria for a rate hike.
The inability of the establishment led by Jerome Powell to address this issue is highlighted by its evasion and refusal to address the issue itself. If someone’s house is on fire, they don’t go to the grocery store first and wait for the stars to align favorably.
The fire must be extinguished immediately. Abdicating this shows that the Federal Reserve knows it cannot deal with the monster it has created. This will continue to erode the purchasing power of those who hold US dollars or any other currency as the phenomenon is felt globally.
The appreciation of gold, despite “intentions” to raise the base rate (the price of gold is generally inversely proportional to interest), perhaps shows that the markets are also gradually realizing the inability of the central bank to solve the problem.