Tough Talk by Fed Officials and the U.S. Debt Ceiling Hit Both Reasons for Safe-haven Plays

Gold Shines as Safe-Haven Asset

The financial markets echoed the uncertainty of market participants which caused a decline in US equities today, and strong gains in gold as a safe-haven play. This was certainly a day in which investors sought safe-haven assets while simultaneously avoiding the intrinsic risk of US equities.

All three major indices declined by just under a full percent and gold gained almost 1.5%. As of 4:25 PM EST, the most active February contract of gold is currently fixed at $1933.90 after factoring in today’s gains of $26.90 (+ 1.41%).

Yellen to Take “Extraordinary Measures”

Today the United States of America hit the debt ceiling set by Congress which is currently over $31 trillion. This will force the Secretary of the Treasury Janet L. Yellen to take “extraordinary measures” by not paying all of the nation’s bills.

This prompted Secretary Yellen to send a letter to the congressional leadership today. This letter follows a letter she sent on January 13 in which she urged Congress to act promptly to protect the full faith and credit of the United States.

“I write to keep you apprised of actions the Treasury Department is taking in regard to the debt limit. In my letter of January 13, 2023, I noted that Public Law 117-73 increased the statutory debt limit to a level of $31.381 trillion, and informed you that beginning on January 19, the outstanding debt of the United States was projected to reach the statutory limit. This letter serves to notify you, pursuant to 5 U.S.C. § 8348(l)(2), of the extraordinary measures Treasury began using today.”

Federal Reserve Officials Underscore the Need for Further Interest Rate Hikes

Recent statements by many officials of the Fed have addressed the need to continue their aggressive monetary policy of interest rate hikes as their major tool to address and reduce the current level of inflation. The Federal Reserve is on record stating its plan to take its benchmark rate to above 5% even with recent data indicating that inflationary pressures might have peaked.

Cleveland Fed President Loretta Mester yesterday said, “I just think we need to keep going, and we’ll discuss at the meeting how much to do.”

This remark was made in an interview with Associated Press in which she added that she expects that fed funds rates need to go “ a bit higher” and then stay there for some time further to slow down inflation. James Bullard also expressed the need for raising rates quicker rather than reducing the pace of rate hikes saying, “why stall?”.

The fact that the United States continues to spend more than it has, is a systemic problem. On each former occasion, the political administration procrastinated by kicking the can down the road, only to offer a solution at the 11^th hour. That solution has always been to raise the debt ceiling. Most importantly, the elevated level of inflation can only magnify the problem.

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Wishing you as always good trading,

Gary S. Wagner