The Fed (specifically, FOMC: federal open market committee) has been manipulating interest rates for decades. David Stockman says since 1973, which was only two years after Nixon “closed the gold window.” With the Treasury no longer having to redeem dollars in gold, massive dollar printing began, first in small amounts (millions) but by 2008 in the trillions.
The manipulations have resulted in both recessions and big stock market upswings. Bull markets came about as the Fed printed, but recessions set in as the dollar creation was cut back.
In the early days, even Federal Reserve chairmen were afraid of printing too much money, which caused inflation. So, there were limits on the number of dollars that the Fed was willing to create, and recessions soon set in when the Fed cut back.
And, that’s where we are today. The Fed is attempting to reduce its balance sheet by letting the bonds it holds mature and not reinvesting the funds. Supposedly, this is happening at a $600 billion a year reduction rate. This is known as QT (quantitative tightening), and it’s resulting in rising interest rates.
However, Fed Chairman Powell made some “dovish” statements recently, and there is speculation that QT will be reduced if not stopped completely. Investors in both stocks and the metals seem to like talk of reduced QT. Stock investors for the liquidity that will remain in the market, gold and silver investors because a continued loose monetary policy will result in inflation.
Now we get to ZIRP.
If the Fed employs a loose money policy, interest rates will not rise. If interest rates do not rise, the Fed has lost a tool to attack the next recession. With the current fed funds rate of 2.25% to 2.50%, there is not much room for interest rate cuts. The people at the Fed know this, so some of them are openly discussing zero interest rate policies.
After ZIRP comes negative interest rate policies, which have already been deployed in the European Union. Add Modern Monetary Theory to the mix, and it doesn’t get any better than this for gold and silver investors.
Finally, the Atlanta Fed cut its estimate for our economy’s growth rate in the fourth quarter to 1.5% from 2.7% after December’s 1.2% drop in retail sales.
As this is written, thought, stocks are hanging tough, with investors seemingly putting more reliance on the prospects of a favorably negotiated trade deal with China than on the Atlanta Fed’s estimate. And, the metals are basically unchanged from yesterday.
However, if no favorable trade deal is reached, stocks could plummet while the metals could see further upside movement.