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What if the Fed is Wrong?

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We just got the minutes of the March FOMC meeting, and as always, the mainstream financial media focused on the positive headlines only, such as:

This headline is a perfect example, because it clearly states that the Fed remains dovish but cleverly adds that this is in spite of an optimistic economic outlook. This way we get the continuation of easy monetary policy and an improving economy at the same time. What could be better?

However, having read the actual minutes in full, I have a very different take on what the Fed said. The following is just my opinion. Make up your own mind as to what the Fed is truly saying.

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In other words, while they may be optimistic, the Fed cites several significant risks why they could be wrong, and they clearly admit that the risk to their outlook is high—i.e., there’s a strong possibility that they could be wrong. So much for that optimism.

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Mainstream commentators focused on the comment above but, as far as I can tell, completely ignored the following within the same paragraph:

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This was far more significant, imho, because the Fed is basically saying that they will intervene to cap bond yields should they continue to rise. While many analysts, including myself, have publicly stated this expectation for quite some time, this is the Fed confirming it themselves. The fact that the Fed has chosen to cap yields at a specific level that only they know has enormous implications for markets, especially precious metals and miners. I’ll explain why later, but for now, let’s switch to their comments in relation to inflation.

The Fed took pains to emphasize that there are currently no signs of inflation. They cited several indicators to support this assertion:

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Talk about laying it on thick. It’s almost as if they are desperate for us to believe them. Why? Because there are signs of inflation everywhere? One only has to look at the recent increases in commodity futures. But it is not the current level of inflation I am focused on, it is the future direction that matters to me, and this is where it gets really interesting.

The Fed clearly stated its inflation objective as follows:

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They also added the following:

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Note the highlighted words above. They stand ready to print even more paper or digital dollars until they hit their inflation target. This is further confirmed by the following statements:

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And again, for emphasis:

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The Fed just restated their plan to do “whatever it takes” when the time comes, which means much more dollar printing out of thin air if yields rise or the economy stumbles again. What if their economic optimism is wrong? What if all of that money printing coincides with supply chain shocks—i.e., more dollars chasing fewer goods and services? I’ll let the Fed answer that one:

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Note the use of the word “temporarily” above. Again, from the Fed:

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What if the Fed is wrong and such supply shocks are neither temporary or transitory but persistent and become more widespread? Exactly what I forecast back in March 2020. The Fed assumes that prices will moderate after a spike in prices, but what if they’re wrong and they keep rising?

Finally, here is the icing on the cake:

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I understand the Fed’s rationale for taking this approach given the level of uncertainty in the world today and their horrific track record with respect to forecasting. The problem with it is that inflation is a lagging indicator. The risk is that by the time they see inflation getting out of control, it’ll be too late to stop it. Given that they have made it clear that they plan to allow inflation to “run hot” for a while, they run the risk that the inflation train will have left the station and they have no means available to stop it. They can’t raise interest rates meaningfully due to the massive and rising amount of debt and the resultant increase in interest costs, which could render the U.S. government insolvent. In such a scenario the risk of hyperinflation is almost certain. It erases the government’s debts and everyone else’s, but it also destroys the value of the currency and people’s savings. If and when it comes to that, more QE will only serve to further accelerate hyperinflationary forces, and then the Fed will be forced to pull the plug. This would trigger the collapse of everything and the Greatest Depression, imho. Even if the Great Reset occurs and a global debt jubilee is orchestrated, it will almost certainly will involve a massive devaluation of the dollar.

CONCLUSION

My takeaways from these Minutes are as follows:

  • The Fed will cap yields and do whatever it takes to support the economy and markets—i.e., much more dollar printing
  • Inflation will rise dramatically, and the risk is that it’ll be worse than expected
  • The Fed can do little if anything to stop it
  • A falling dollar will only make matters worse as all confidence is lost in the greenback
  • Precious metals and miners will soar as real yields plummet when inflation rises as nominal bond yields remain fixed

Perhaps I’m wrong. Or maybe it’s the Fed that’s wrong.

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About the Author

David Brady has worked for major banks and corporate multinationals in Europe and the U.S. He has close to thirty years of experience managing multi-billion dollar portfolios including foreign currency, cash, bonds, equities, and commodities. David is also a CFA charter holder since 2004.

Using his extensive experience, he developed his own process utilizing multiple tools such as fundamental analysis, inter-market analysis, positioning, Elliott Wave Theory, sentiment, classical technical analysis, and trends. This approach has improved his forecasting capability, especially when they all point in the same direction.

His track record in forecasting Gold and Silver prices since has made him one of the top analysts in the precious metals sector, widely followed on Twitter and a regular contributor to the Sprott Money Blog.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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