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Fed expects no recession as inflation negates actual economic growth

By Mike Gleason
web posted July 31, 2023

Rate hike concerns were weighing on precious metals markets last week.

The Federal Reserve lifted its benchmark funds rate by a quarter point as expected last Wednesday. Many investors had been looking for central bankers to signal that would be the final hike of the year. But stronger than expected economic data suggest the Fed may not be done – especially with inflation still running above target.

As NTD News reports, higher borrowing costs will continue to work their way through markets and the economy.

NTD Reporter: One month after a pause, the Federal Reserve is raising interest rates once again to the highest level in more than 20 years.

Jerome Powell: We took another step by raising our policy interest rate a quarter percentage point. We've covered a lot of ground, and the full effects of our tightening have yet to be felt.

NTD Reporter: On Wednesday, Fed Chairman Jerome Powell announcing its 11th rate hike since last spring. For people looking for a home loan, this latest round of interest hikes means they'll pay more for their property. And there's no guarantee relief is coming anytime soon. Economists say more rate hikes could be ahead this year.

Economic Commentator: Inflation is still too high. The Federal Reserve is raising interest rates aggressively to slow the economy and get that inflation back down.

Following the Fed's rate increase, the preliminary gross domestic product reading for the second quarter came in at a better than expected 2.4%. Thursday's durable goods orders report also exceeded expectations. Meanwhile, weekly jobless claims came in on the low side.

The bullish economic headlines emboldened monetary hawks and boosted the U.S. dollar on foreign exchange markets. As a consequence, precious metals markets sold off sharply last Thursday.

Last week's price action shows metals markets still mired in the summer doldrums. Bulls will likely have to wait for more clarity from central bankers on interest rates before a sustained rally can commence.

Fed Chairman Jerome Powell said during remarks to the media on Wednesday that Fed economists no longer expect a recession to take hold. But the economy may not be as strong as official GDP and employment reports suggest.

In fact, the leading economic indicators have fallen for 15 months in a row through June. Moreover, the yield curve remains deeply inverted with long-term bonds yielding much less than short-term paper.

If the economy were truly booming, the LEIs would be pointing up and the yield curve would be normalized. Instead, they are both flashing recession warning signs.

Just as the Fed waited too long to raise interest rates while inflation was raging, it may now be hiking too late into the business cycle as higher borrowing costs crimp consumer spending and capital investment. The full effects of the Fed's latest bump up in the funds rate won't be known or felt for months. At that point, policymakers could already be in the process of trying to loosen monetary policy all over again.

Of course, nobody can predict when turns will occur in the business cycle or interest rates with any sort of certainty. Fed officials have proven to be dead wrong in the past ahead of major turning points in the economy and financial markets.

And investors who think they can time the market with any degree of success typically end up faring poorly. Successful investors tend to take a disciplined approach of buying and holding assets that represent good value unless and until the fundamentals for those assets change.

Right now hard assets offer attractive relative value compared to stocks and bonds. Precious metals markets have a compelling supply and demand story, with mining production flat-lining while both industrial and monetary demand are growing.

Gold and silver also tend to fare better during recessions than the stock market. The next recession might not be officially declared this year, but it won't be put off indefinitely. Unlike recent downturns that began while inflation was relatively mild, the next one could be accompanied by stubbornly high inflation that central bankers as of yet haven't been able to bring down to target.

Stagflation can be brutal for investors who hold conventional financial assets. Owning physical precious metals can help make it bearable – and potentially even profitable. ESR

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.

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