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Whom to believe

Is the US economy slowing down, which will prompt more Fed stimulus, or is it “dramatically better” as NY Fed President William C. Dudley said in a recent New York Times interview, which will allow the Fed to raise the discount rate later this year?

In the first quarter, US Gross Domestic Product rose only 0.5%, its slowest quarterly rate in two years.  And, there was no “weather impact,” as has been the case in past years.  The 0.5% increase was less than half the increase for the 4th quarter 2015, which was down from the 4th quarter 2014.

According to the Financial Times, the “deceleration comes amid sluggish growth around the world, with the International Monetary Fund this month cutting its global forecasts for the fourth time in a year.”  Christine Lagarde, Managing Director of the IMF, has long said that the US should opt for an accommodative monetary policy and not raise rates.

Conflicting with Dudley’s position are the economic woes of Japan, which has slipped back into deflation despite a huge economic stimulus program over the last few years.  Further, the European Central Bank sees the need for its own massive quantitative easing program to fillip economic activity there.  And, China is contending with an economic slowdown.

Can the US economy be “dramatically better” while our major trading partners are suffering?  We truly have a world economy, and the Fed cannot ignore it when determining monetary policy.

If the economy does not significantly improve over the next two quarters, look for cries for “fiscal stimulus,” basically more deficit spending by the federal government.  Infrastructure spending will be an easy sell.  With this being an election year, fiscal stimulus will be popular with both political parties.

This is truly a climate in which gold and silver will do well.  Typically, the summers see lackluster metals markets.  Buy the dips.  More government interference in the markets guarantees stronger gold and silver markets.


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