To Hike or Not to Hike

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That is the query. Sure, the Fed may try to raise the fed funds rate as early as next month. They might even try again in April or May. 

As February begins, we may begin to anticipate what the rest of the year has in store for us. Both 2022 and 2010 began with the storey of impending rate rises and a reduction in the Fed’s balance sheet, and both concluded with the polar opposite of rate cuts and further QE. 

And now we’ve arrived in 2022. The “markets” and Wall Street’s eight-figure sell side experts all believe that the Fed is poised to start on an aggressive rate hiking programme.

And we’re not only referring to the ones stated above. Instead, these smart theorists now predict up to SEVEN Fed funds rate increases this year. 

So, let’s see what happens. A total of seven rate rises would put the fed funds rate (overnight) in the 1.75-2.00 percent range. Okay, OK, but what about the remainder of the yield curve? The 2-year note already has a yield of 1.20 percent. Could we anticipate the 2-year note yield to rise to around 3% if Fed rates rise to 2%? Why not, after all? And, if the yield on the 2-year note is 3%, where can we discover the yield on the 10-year note? What about 4%? Consider the impossibility of it for a moment.

And now we’re in early 2022. The Fed has yet to raise the fed funds rate even once, yet notice how similar the current S&P chart is to the one above. 

Perhaps you live in a fantasy world where you believe the Fed would allow a stock market meltdown in order to “deflate certain bubbles.” That is not only hopelessly oblivious to economic reality after thirteen years of QE and ZIRP, but it also contradicts recent history.

  • As 2010 began, the Fed’s sycophants in the media and on Wall Street swore that QE1 was a “one-time” event that would never be repeated. Interest rates and the Fed’s balance sheet will revert to “normal,” pre-Financial Crisis levels in the near future. 
  • Reality? In November of 2010, the Fed unveiled the $600 billion QE2 initiative. 
  • As 2019 began, the Fed’s sycophants in the media and on Wall Street predicted that the Fed would keep increasing that year, with the 10-year note yielding more than 4.0 percent. 
  • Reality? The “Powell Pivot” was triggered by the December 2018 stock market meltdown, and the Fed began decreasing the fed funds rate in June 2019.

Why The yield on the 10-year Treasury note declined from 3.25 percent in November 2018 to 1.50 percent in September 2019. 

How did dollar-priced gold do throughout these times? 

• +29.5 percent in 2010; +10.1 percent in 2011; +18.9 percent in 2019. 

• +24.6 percent in 2020 

The Fed has promised to begin raising the fed funds rate while concurrently reducing its balance sheet. Perhaps this time will be different. Maybe their beloved stock market won’t fall this time? Maybe the US economy can endure higher interest rates and all of the economic consequences that come with them. But have you seen the Atlanta Fed’s most recent Q1 GDP forecast?

It looks that the United States is already on the verge of a stagflationary recession, and seven rate rises are on the way. That’s OK. 

Physical gold and silver have always been — and will continue to be — your best defence against this lunacy. You might consider purchasing some before costs rise again in the coming weeks.

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