Previewing Powell’s J-Hole Jawbone: “Buy Gold in Case it All Goes Wrong…”
The comments below are an edited and abridged synopsis of an article by Bill Slain
Fed Chair Jay Powell has announced ‘average inflation’ targeting: The Fed will continue with a 2% inflation target, but instead of worrying if it goes above that, it will allow inflation to remain higher for longer, i.e. averaging for the periods when it’s been sub-target.
So the Fed will ignore inflation, and won’t hike interest rates if/when the economy is overheating and inflation rises.
Inflation averaging means “don’t worry about rate hikes, or normalizing rates, we’re so desperate for inflation that we’re going to encourage it.” It’s a way of reassuring the market that there won’t be interest rates hikes, and removes the fear of a market tantrum if inflation were to rise.
In the battle against deflation, the Fed sees markets as the major weak spot. It is managing markets to avoid a global market meltdown, which would further drive chronic economic weakness.
Economically, the effects of pandering to markets are proving disastrous; there are inflated assets bubbles and a massive debt anchor.
Covid-19 has catalysed an economic crisis that’s been brewing since 2008. It’s a culmination of over-regulation, a transfer of risk from banks to the asset management sector, distortions from artificially low interest rates creating massive price bubbles across all financial assets, soaring debt levels, and deflation, rather than inflation, becoming the major threat.
It’s happened at a time of enormous technical innovation, which has hidden the reality of a growing deflationary threat as Western economies choke on debt and companies become debt-encumbered zombies.
Getting the economy back on track is proving tougher than central banks expected. They know that QE failed to stimulate growth after 2008, but it did avoid a succession of market collapses by bailing out banks and supporting jobs by stopping insolvent companies from going bust.
The right strategy is to keep arbitraging the mess that central banks have created and are walking us all into. Central banks are trapped in promises to do whatever it takes, and keep interest rates low forever—whatever inflation does. The problem for investors is where to find returns; the only answer is to take on more risk for lower returns.
And buy gold for when it inevitably all goes wrong.