Ahead Of The Fed - June 2023

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We've been waiting all year for The Fed to finally pause and pivot. With the June FOMC upon us, it appears that the moment has finally arrived.

If you're a regular reader of these weekly columns, then you'll recall that the eventual shift in Fed policy was a central tenet of our annual "macrocast" when it was written back in early January. Monetary policy in 2023 is akin to 2010 and 2019, two recent years where similar policy shifts occurred.

Just as in 2010 and 2019, we've waited out the hiking and hawkish rhetoric of The Fed and now rate cuts and additional debt monetization are on the horizon.

Wednesday brings the conclusion of the June FOMC meeting and, after the latest CPI inflation data that was printed on Tuesday, it appears highly unlikely that The Fed will hike the fed funds rate another 25 basis points, with the probability of a rate hike falling to just 6% at present.

While there remains the possibility that The Fed will hike one last time at the FOMC scheduled for July 25-26, it's very likely that they are finished and that the rate hike cycle is complete. The next argument will now begin over how long rates will stay elevated before the first rate cut. I think we can answer that today.

Over the last 13 rate hike cycles, the average period between the last Fed rate hike and the first Fed rate cut is about 90 days. Sometimes it's a little longer and sometimes it's a little shorter but, on average, The Fed begins to cut pretty soon after the last hike, as you can read here:

•  https://www.investing.com/analysis/us-interest-rates-time-between-last-hike-and-first-cut-200625575

The U.S. economy is already demonstrably slowing. The only remaining data upon which the "soft landing" folks can rely is the unemployment rate and the latest claims for unemployment compensation (jobless claims). While this data had seemingly remained firm for the first third of the year, it has recently begun to soften...which is what you'd expect from this lagging recession indicator. As you can see below, new jobless claims are at 20-month highs and rising.

These new claimants will soon impact the unemployment rate too, which has somehow remained below 4% for the most consecutive months since 1970. Expect that trend to come to an end very soon.

So, as the U.S. economy turns south, the following timetable emerges for The Fed:

FOMC July 25-26: No rate hike or cut

Jackson Hole August 26: Powell hints at a higher inflation target and initial rate cuts

FOMC September 19-20: the first 25 basis point fed funds cut

FOMC December 12-13: the second 25 basis point fed funds cut

Now look, that's a forecast for the next seven months and there are all sorts of unknown unknowns that may occur to interrupt the schedule laid out above. However, any unforeseen events will only serve to increase, not decrease, the pace of fed funds cuts. The important point is that rates are headed lower from here. Of that, you can be certain.

As far as the COMEX precious metals are concerned, recognition of this impending shift in Fed policy is what will drive prices higher. While it may be late summer before COMEX gold finally breaks out above $2080, once it does, and as forecast back in January, it should head to $2300 sometime before year-end.