Gold Analysis – The Federal Reserve Will Accelerate Its Monetary Policy to Lower Inflation

Why Is Inflation Rising?

More alarming is the fact that, according to many analysts and members of the Federal Reserve, inflation will continue to increase before shrinking back down to acceptable levels.

The most current data comes from a study by Cleveland’s Federal Reserve Bank with forecasts for inflation levels in March, as well as a forecast for inflation levels for the first quarter of this year. Their studies indicate that inflation in March could be as high as 8.41% year-over-year. They are also predicting that the inflation level for Q1 2022 could run as high as 9.1%.

To say that the Federal Reserve is behind the curve would be an understatement. The current level of inflation did not begin overnight and had been steadily climbing since 2020. It is a direct result of two primary factors actions by the administration and the actions of the Federal Reserve.

The administration allocated huge amounts of capital to address the economic contraction and recession that was the byproduct of the global pandemic. Trillions of dollars were allocated for aid to those individuals in need, and the tremendous increase of unemployed Americans resulted from the interruption of businesses during the pandemic. According to “TruthinAccounting.org,” the national debt published by the United States is currently approximately $30.5 trillion.

However, according to this publication, the national debt in the United States is much higher, with their estimates at $141.461 trillion. The graph above visually lays out the assets of the United States government as well as its liabilities. It concludes that our real national debt, which was created using data by the U.S. Treasury Department and the Social Security and Medicare trustees, is actually $142 trillion.

The second primary force that created the current level of inflation was the huge allocation by the Federal Reserve purchasing assets consisting of mortgage-backed securities and U.S. debt. At present, the Federal Reserve has in excess of $9 trillion in assets that it will begin to unwind as a major component of its plan to tighten its current monetary policy which will occur in conjunction with rate hikes throughout the remainder of the year.

What Can The Federal Reserve Do to Reduce Inflation?

Although the administration is no longer providing massive capital in terms of aid packages, it is now up to the Federal Reserve to attempt to undo the current level of inflation which took years to create. Their first step was to reduce their monthly asset purchases which were completed earlier this year. Their second step was to begin to raise the Fed Funds interest rate.

The first-rate hike occurred at the last FOMC meeting, raising interest rates by ¼%. The Federal Reserve will likely continue to raise rates at each of the remaining six FOMC meetings this year. The last step the Federal Reserve will be to reduce the assets on its balance sheet.

Fed Governor Lael Brainard, in a speech written for the Minneapolis Fed discussion, said that the Federal Reserve will lay out a plan “at its May meeting for running down some of the nearly $9 trillion in assets, primarily Treasuries and mortgage-backed securities, on its balance sheet.” She added that they expect to reduce their balance sheet at a “rapid pace.”

“The [FOMC] will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting. Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017-19.”

Gold Fundamental Analysis

Her speech today had a tremendous impact on financial markets across the board. In the case of gold pricing which traded to a high of $1948.90 prior to the release of a written speech sold off at a rapid pace taking gold futures to a low of $1920.90. As of 5:30 PM EDT, the June 2022 gold futures contract is currently trading down $7.40 and fixed at $1926.60.

The chart above is a 10 minute candlestick chart that illustrates the pace at which gold sold off immediately following the statement of Federal Reserve Governor Lael Brainard. Lael Brainard who has been considered a more dovish member of the Federal Reserve, acknowledged that the central bank needs to act quickly and aggressively to drive down inflation.

The problem is that the Federal Reserve waited too long before revising its monetary policy to address a multi-year rise in inflation. The more aggressive steps currently planned by the Federal Reserve will almost guarantee that a “soft landing” is virtually impossible.

In other words, the fallout from the Federal Reserve aggressively tightening its monetary policy will most certainly cause the economy to contract in the United States. Lastly, the Federal Reserve cannot unwind the level of current inflation that took years to create in a short period of time, as Chairman Powell has stated during his last press conference.

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Wishing you as always good trading,
Gary S. Wagner