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Federal Reserve’s Monetary Policy Moves Gold Substantially Higher

Yesterday’s release of the Federal Reserve’s current monetary policy, coupled with statements made during the press conference by Chairman Powell, signaled a continuation of the extremely accommodative stance. By keeping interest rates (Fed funds) near zero, and their ongoing purchases of mortgage-backed securities and U.S. debt. The Federal Reserve has had the enormous task of reigniting a $20 trillion economy that was brought to its knees as a direct result of the global pandemic which caused a global recession.

Chairman Powell made it clear that they will continue to support the economy until their goal of maximum employment is reached. He added that the jobs market in the United States still had “ground to cover” before they would begin to normalize rates and begin to taper their asset purchases. He also maintained the assumption that the vast majority of the current inflation rate is transitory.

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However, the CPI (Consumer Price Index) is currently at 5.4%, and that high of an inflation level has not been seen since 2008. The Federal Reserve’s go-to inflation index the PCE (Personal Consumption Expenditures), is now at 3.4%. This is well above what the Federal Reserve anticipated when they decided to focus on the labor market, and let inflationary pressures run hot.

The economy in the United States is growing rapidly as businesses reopen. The U.S. economy is bigger now than it was before Covid, according to the Commerce Department through the St. Louis Federal Reserve. GDP is currently at 6.5% at an annual pace in the second quarter of 2021. This follows the GDP of the first quarter which came in at 6.3%. However, economists polled by the Wall Street Journal had estimated that there would be a 9.1% growth rate in the GDP.

What is alarming is the steps that were necessary to take the battered economy in the United States to its current strong GDP numbers. Fiscal stimulus in 2019 was approximately $1 trillion. This was followed by an additional $4 trillion allocated for fiscal stimulus in 2020. In the first quarter, the new administration added $1.2 trillion in fiscal stimulus. Collectively the programs created by the United States government have raised our national debt, which is now hovering close to $30 trillion. In February 2020 the national debt was at $23.3 trillion. Even Chairman Powell acknowledge last month our current spending and debt level is not sustainable.

The Federal Reserve’s balance sheet of assets has now swelled over $8 trillion. During the 2009 recession, the Federal Reserve’s balance sheet swelled to approximately $4.5 trillion, which was reduced by tapering to $3.7 trillion. The Fed balance sheet has more than doubled in the last two years.

Simply put, the enormous debt that the United States has to carry has a tremendous cost in terms of interest payments even at the current extremely low rates. The ramifications of the United States servicing of higher interest rates is that it will put tremendous pressure on the ability of the U.S. treasury to service that debt.

The extreme level of debt could easily continue to pressure the U.S. dollar lower and that in turn would move gold higher as investors turn to the safe-haven asset class which has protected investors against inflation for hundreds of years and most likely will continue to do that for many years to come…

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Wishing you, as always, good trading and good health,

Gary Wagner