On Wednesday, the FOMC will hike the fed funds rate again and promise three or four additional hikes in 2019. But be aware that this forecast is far from being a done deal.
Once the FOMC statement is released at 2:00 pm EDT on Wednesday—and once Chairman Powell concludes his press conference some 90 minutes later—you will be bombarded with analysis of how great things are, how the Fed may be "behind the curve" and how several more rate hikes will be forthcoming in 2019. But are these forecasts accurate, and what will be the impact on precious metal prices should the outlook change?
No doubt the FOMC will note what appears to be an economic nirvana in the United States. Manufacturing will be labeled "strong", job growth will be called "robust" and consumer confidence will be noted as "surging". For these reasons, the FOMC will suggest another fed funds rate hike in December and then forecast as many as four more such hikes in 2019. But is this realistic?
At the most basic level, another 100 basis points in fed funds rate hikes will drag that level to nearly 3.5%, and if 10-year rates follow along, they would be approaching 4.5% one year from now. What would this further surge in interest rates do to economic growth?
Furthermore, interest rates at these levels would only exacerbate the soaring funding and debt service costs for state and local governments, as well as individuals and corporations. Can the U.S. economy withstand this type of pressure? Already it appears that the U.S. consumer has reached "peak confidence", while fed funds are nearing the trendline from which recessions have followed over the past twenty years.
But let's consider other prominent threats to the perceived health of the U.S. economy. Back in January, we detailed three risks to the US$—and thus the U.S. economy—in 2018. These risks continue and will be prominent again in 2019:
- Political Risk -- What is the risk to consumer confidence, the stock market and economic growth should the Democrats retake the U.S. House, U.S. Senate or both in November? Not only would President Trump's agenda of tax cuts and trade protection stall, his administration would likely be imperiled by seemingly endless Congressional investigations.
- Geo-Political Risk -- How does a worsening conflict in Syria and Iran impact the U.S. economy? Perhaps more significantly, how might soaring crude oil prices impact disposable income and spending?
- De-Dollarization Risk -- Though this is a more long-term concern, U.S. isolation is increasing as the world slowly turns away from US$ hegemony and moves toward a more multi-polar financial system
Thus, please don't blindly accept the forecast of sunshine and lollipops that the FOMC will regurgitate on Wednesday. In the real world, the risks laid out above should give you pause to consider that perhaps the Fed's projections of seemingly endless economic growth are a bit overstated.
And what happens to gold and silver when these Fed forecasts fail to verify? For now, COMEX gold is priced as if economic and market risk is muted, the dollar will remain strong and real interest rates will continue to rise. But what if that's not the case and the risks to the U.S. economy laid out above take hold?
By the second quarter of 2019, the Fed could be talking about rate cuts. A contracting U.S. economy will lead to falling tax receipts, thus requiring additional fiat creation and even talks of a resumption of "Quantitative Easing". Under this scenario, do you think that the prices of COMEX gold and COMEX silver will remain at present levels?
Therefore, the time to think for yourself is now. Do not get caught in this week's FOMC hype regarding future economic growth and rate hikes. Instead, understand the likelihood of an opposite, contradictory scenario playing out in 2019 and then take steps to prepare accordingly.