I won’t say it’s a fistfight yet, but we aren’t seeing the greatest harmony at the Federal Reserve these days when it comes to inflation. Is it here? Is it coming? How bad will it be? You can find a variety of opinions within the institution itself. Same with stagflation—is it or isn’t it here?
If you are keeping up with the news, you likely know by now what Fed Chairman Jerome Powell’s position is on the Consumer Price Index’s (CPI’s) sharp rise since April. Powell has steadfastly attributed the jumps to “transitory” inflation primarily resulting from reopening of the economy as we all acclimate to living with COVID.1 With respect to monetary policy, therefore, Powell believes the inflation we’re seeing is temporary—secondary in importance to achieving maximum employment. In other words, no rate hikes anytime soon.
To be fair, last week Powell did suggest America’s central bank could begin tapering its asset-purchase program (quantitative easing) later this year. But, again, he took the opportunity to emphasize that “we have much ground to cover to reach maximum employment.”2 It was another indication that he feels explicit rate hikes remain far in the distance.
It makes me wonder—what do Powell’s Fed presidents think. Do they agree with him that inflation is less important now? Clearly not all of them. Back in June, St. Louis Federal Reserve President James Bullard said he expected rate hikes would begin next year.3 Since then, year-over-year CPI registered at 5.4% for both June and July and the groundswell of pro-rate-hike sentiment at the Fed continues to grow.
Philadelphia Federal Reserve President Patrick Harker also thinks rate hikes may have to come sooner rather than later. He said recently that price pressures “may not be so transitory, and that’s a risk I’m worried about.” Referring to business contacts in his district, Harker said, “What I’m hearing is they’re trying not to pass most of that along to the consumer and customers … That said, they are passing some of that along. That’s inevitable. So far people have been understanding. That won’t last forever. At some point, we need to get this under control.”
So, in spite of the varying internal opinions within the nation’s central bank, there seems to be a growing consensus among those on whom the nation relies for monetary policy that chronic inflation is on the verge of becoming a problem.
But can the Fed really raise rates to chase down rising prices? Some say no, and that reality means feared stagflation (an especially troubling form of inflation characterized by little or no associated economic growth) could set in. It’s this trend (a pattern we’ve seen before), that is making some retirement savers, faced with managing holdings through a climate of rising prices, consider turning to gold to help hedge against inflation or stagflation.
Last month, I wrote about the lurking stagflation threat in the U.S. At the time, inflation continued to rise, unemployment still hovered around 6%, and consumer confidence was on the skids. Economist Desmond Lachman, former deputy director at the International Monetary Fund, wrote a piece for The Hill underscoring what he saw then as a compelling stagflation threat.4
A month later, little has changed. Unemployment is down somewhat from 5.9% in June’s to 5.4%, but year-over-year inflation came in at 5.4%. Moreover, consumer confidence has fallen sharply. The University of Michigan consumer sentiment index for July fell to 70.2, the lowest since 2011.5 And now economist Nouriel Roubini says a mild stagflation is upon us already.
In an article for MarketWatch, the former senior adviser to Obama Treasury Secretary Tim Geithner points out rising inflation now is accompanied by pronounced growth slowdown in not only the U.S. but China and Europe as well due to supply-chain bottlenecks.6
Roubini says these bottlenecks are the result of higher “production costs, reduced growth output, and constrained labor supply” ultimately attributable to the COVID delta variant (the same potential stagflation catalyst identified by Desmond Lachman).
“On the production side, delta is disrupting the reopening of many service sectors and throwing a monkey wrench into global supply chains, ports, and logistics systems,” Roubini writes. “Shortages of key inputs such as semiconductors are further hampering production of cars, electronic goods, and other consumer durables, thus boosting inflation.”7
But as for raising rates – or even beginning to taper – to help rein in rising prices, Roubini says forget it.
Like most central banks, [the Fed] has been lured into a “debt trap” by the surge in private and public liabilities (as a share of gross domestic product) in recent years. Even if inflation stays higher than targeted, exiting QE too soon could cause bond, credit, and stock markets to crash. That would subject the economy to a hard landing, potentially forcing the Fed to reverse itself and resume QE.8
The debt trap Roubini refers to is something I’ve mentioned quite a bit in recent weeks. Tapering asset purchases is one thing. But explicit rate increases are something else. Many experts are convinced the Fed essentially has no wiggle room for interest rate hikes because of how thoroughly dependent key asset bubbles are on rate levels that remain at or near record lows.
The question we always dance around is what can normal, everyday American savers do to fight against this kind of economic angst. We could take a cue from the recent acute interest in gold right now on the part of some of the most significant individuals and entities on Wall Street, including institutional asset managers and billionaires. As the inflation/stagflation threat grows, so grows the trend of those with substantial financial “heft” turning to gold for possible relief.
One billionaire – hedge fund manager John Paulson – recently told Bloomberg he believes gold is a good place to be because of what he sees as its inflation-fighting capacity. Referred to by the New York Times as “one of the most prominent names in high finance,” Paulson specifically cited the stagflationary 70s as a period when gold went “parabolic” because of all of the mainstream-asset money that was running for cover underneath a much smaller supply of gold.10 Paulson says he sees the sharp increase in money supply in the last year-plus as a key indicator that troubling inflation is afoot.
Separately, legendary Franklin Templeton asset manager Mark Mobius said recently everyone should have 10% of their portfolio in gold right now. Mobius has grave concerns about the effects that unprecedented levels of COVID-cued economic stimulus could have on the value of currencies worldwide. “Currency devaluation globally is going to be quite significant next year given the incredible amount of money supply that has been printed,” Mobius told Bloomberg.11
Is 10% of your savings in gold right for you? Should you have less? More? Is ANY gold right for you? Ultimately, these are questions you’ll have to answer for yourself. But as the inflation stakes appear to rise and a stagflationary environment starts to set in, it’s notable that some of Wall Street’s most notable names are enthusiastically turning to gold in an effort to mitigate the effects of rising prices and capitalize on what they believe is an associated growth opportunity in the yellow metal.
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