The Federal Reserve announces that they will begin to taper asset purchases this month
As expected, today, after the November FOMC meeting, boththe statement and press conference by Jerome Powell acknowledged that they willbegin the process of tapering their monthly asset purchases this month.Starting this month, they will reduce their monthly purchases of U.S. debt by$10 billion each month and reduce their monthly purchases of MBS(mortgage-backed securities) by $5 billion monthly. This would mean that theywill complete the tapering process in eight months, concluding in June 2022.The Federal Reserve instructed agents at New York Fed to begin executing thereducing bond purchases in mid-November.
But there was a caveat to that statement. During ChairmanPowell's press conference, he stated that although the U.S. central bank willbegin the reduction of asset purchases this month, he tempered that statementby saying that they were open to adjusting the monthly reductions if called forby market conditions.
Reporters for Reuters, Howard Schneider, and Ann Saphirsaid that "Policymakers, the Fed said, judge that "similar reductions in thepace of net asset purchases will likely be appropriate each month, but (are)prepared to adjust the pace of purchases if warranted by changes in theeconomic outlook."
In terms of an interest rate lift-off, it has been widelyassumed amongst analysts that an interest rate normalization or lift-off couldnot begin before the tapering process is complete as it would be detrimental toeconomic recovery. That being said, the Federal Reserve did not indicate whenthey would begin interest rate normalization. At the same time, the FederalReserve made it clear that they intended to leave interest rates where they areuntil inflation moves back to its 2% target.
Furthermore, the Fed made it clear that they would notconsider interest rate hikes until inflation was on track, only moderatelyexceeding 2%, which Powell stated would take more time than originallyanticipated. However, they still have stuck to their belief that the vastmajority of inflationary pressures such as supply chain issues and laborshortages will be transitory.
Reuters reported that "Overall,the central bank said it still believed that recent high inflation would abate,but the small change in the language indicated Fed officials see the processtaking longer. Inflation by the Fed's preferred measure, the personalconsumption expenditures price index, has run at double the target rate sinceMay. Still, officials are reluctant to change their policy outlook until it isclear that the pace of price increases won't ease on its own."
During Chairman Powell's pressconference, he said, "As the pandemic subsides, supply-chain bottlenecks willabate and job growth will move back up, and as that happens, inflation willdecline from today's elevated levels. Of course, the timing of that is highlyuncertain."
One interesting fact contained intoday's statement was that "Economicactivity and employment have continued to strengthen." This statement conflictswith the most recent GDP numbers for the third quarter of 2021. The governmentreleased a report recently showing that the GDP has contracted from 6.7% duringthe second quarter to 2% in the third quarter.
Today's FOMC statements, alongwith Chairman Powell's press conference had a dramatic impact on the financialmarkets as a whole. In terms of the U.S. equity markets, they were tradinglower before the release of the statement and moved higher as the statement wasreleased and Chairman Powell spoke. All of the U.S. equities closed at recordhighs with the NASDAQ composite gaining 1.04%, the S&P 500 gaining 0.65%,and the Dow Jones industrial average gaining 0.29%.
Concurrently although gold movedoff of its lows seen before the release of the statement and Powell's pressconference gold still closed dramatically lower. Gold futures basis, the mostactive December 2021 contract was trading down by $23 before the release of thestatement, and as of 5:35 PM, EDT is currently fixed at $1770.10 afterfactoring in today's net decline of $19.30, or -1.08%. The dollar also closedlower on the day, giving up 0.23% (0.219 points) and is currently fixed at93.86.
Unquestionably the FederalReserve is hedging its bets as it did announce the beginning of tapering butalso alluded to their openness to adjust the tapering timeline of assetpurchases. Much of their policy is built on the assumption that the currentlevels of inflation are transitory but put caveats to their tapering process incase they are wrong. The Federal Reserve is less confident that inflationarypressures will subside as quickly as they first perceived. This leaves us toour conclusion to today's press conference.
While the Federal Reserve has notacknowledged that we are in an economic period called stagflation, which occurswhen there is persistently high inflation combined with high unemployment andstagnant growth in a country's economy. The economic scenario that the UnitedStates is currently experiencing meets all three requirements. If thiscorrectly depicts our current economic conditions it presents a problem.
InflationData.com defined theissues eloquently saying that, "clamping down on interest rates is kind of likestomping on the accelerator with one foot (increasing the money supply) andstomping on the brakes with the other (increasing interest rates). The major problem with stagflation is thatthe normal methods of increasing interest rates don't help the situation. Theonly reason it helps in times of high economic activity is because it slows the"velocity of money" or the speed at which it changes hands."
Unfortunately, currently, the Fedis still in denial about the stagflation situation and is maintaining low-interestrates and decreasing the money supply by reducing their asset purchases. Theircurrent strategy is risky; if they are incorrect about inflation beingtransitory, it could be detrimental to the U.S. economy.
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Wishingyou, as always, good trading and good health,
By Gary WagnerContributing tokitco.com
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gary@thegoldforecast.comwww.thegoldforecast.com