With Wednesday’s increase in the fed funds rate to the 2.25% – 2.5% level, Jay Powell, Fed chairman, challenged President Trump to a game of chicken. Already Powell looks weak.
In his press conference after announcing the rate increase, Powell backed off three rate increases forecast for 2019 to two and included in his statement that“further gradual” rate hikes would be appropriate.
If there are no rate hikes in first two or three FOMC meetings, which are scheduled for January, March and April, Trump clearly will have the upper hand. The president is a self-declared “low interest rate” man and has been critical of Jay Powell and Fed rate hikes.
Before the announcement, the Dow was up 350 points with buyers hoping for a “no hike.” (Betting on the CME had a “no hike”at 30% chance.) Within an hour of the announcement, the Dow lost 800 points and closed on the day with a loss of 352 points. The next day, stocks plummeted again. Such is the world of investing in stocks nowadays. Volatility.
Meanwhile, gold has quit inching higher and is now posting double digit leaps. Silver, at $14.85, is struggling to climb back to the $15 level, which it fell through back in August. A gold/silver ratio of 85 shows that gold is leading this precious metals bull market.
A common rationale for the Fed hikes is that the Fed needs to get interest rates to a level that when another recession hits it will have the capability of lowering interest rates to lessen recessionary impacts. However, simply raising interest rates may bring on a recession, if not a depression.
In the depths of the 2008 Great Recession, the business sector carried debt of $10trillion. Today, that debt load stands at $15 trillion. Servicing that debt as interest rates move higher will be a drag on profits and the economy.
If the Fed doesn’t get lucky –by lucky I mean a strengthening stock market and solid GDP numbers — look for a loss of confidence in the Fed by even its most staunch supporters. Gold and silver should do very well in this climate.