Economic Turmoil Will Prompt The Fed To Lose Its Nerve

As trading kicks off for July and the year's second half, investors are hoping for a third-quarter rebound. It’s been a brutal year so far in financial markets. The S&P 500 is down over 20%. Bitcoin has crashed by 60%. Bonds have provided no safe haven amid hot inflation. And spiking mortgage rates point to a potential calamity in the housing market.

As for gold, the monetary metal is essentially flat for the year. It may not be cause for celebration, but gold holders have at least obtained some shelter from the broader market volatility. Metals markets are caught between the forces of inflation and the threat of recession.

Signs point to an economic downturn already being underway. It could be accelerated by another outsized Federal Reserve rate hike later this month.

The Fed continues to feel pressure to do something about inflation. This week, the central bank’s preferred core Personal Consumption Expenditures index came in at 4.7%. That represents a decrease for the third consecutive month, although the annual rate remains well above the Fed’s 2% target.

The core rate also excludes food and energy costs. Factoring those critical costs of living back in puts the PCE at 6.3%. Alternative measures show inflation is running even hotter. But the recent plunge in commodity prices will likely provide at least some temporary respite from inflation running at multi-decade highs.

Whether inflation is indeed contained remains to be seen. Fed policymakers may be forced to scale back their tightening campaign if financial markets continue to plunge and the economy inches closer to recession. Political pressures will also be bearing down on the Federal Reserve Board as the mid-term elections approach.

Biden recently cheered the House of Representatives for passing the so-called Financial Services Racial Equity, Inclusion, and Economic Justice Act. The Act requires the Fed to “exercise all duties and functions in a manner that fosters the elimination of disparities across racial and ethnic groups with respect to employment, income, wealth, and access to affordable credit.”

That means the central bank will have to veer from its dual mandate of full employment and price stability to prioritize race in monetary policy decisions and regulatory actions. The same central planners who failed to anticipate the high rates of inflation their policies have caused will now be tasked with using their tools to engineer equal outcomes among groups.

Earlier this year, Biden appointed radical activist Lisa Cook to the Fed’s Board of Governors. Cook has called for a racial “reckoning” that might, among other things, include reparations for slavery. Last year, the Federal Reserve Bank of Boston published a paper calling for “restorative housing reparations.”

If there’s any silver lining for the sound money movement, the overt politicization of the Fed will hasten the fall of public trust in it. From falsely proclaiming that inflation would be transitory to more recently denying that a recession is coming, the Fed has already lost much credibility with the public. It will lose even more if it goes full Marxist on redistributing wealth.

Other countries that have tried empowering central banks to reshape society radically have gone down the road to hyperinflation and economic ruin. Such an outcome can potentially be avoided if voters force the political trajectory in Washington to shift. But it is still prudent to prepare for a worst-case scenario just in case.

Collapsing confidence in central bankers is an opportunity for sound money advocates and precious metals investors. The more apparent it becomes that the Fed is wielding its tools for ends other than a stable currency, the more people will realize the need for a sound alternative. The soundest currencies historically have been gold and silver. They remain irreplaceable today as the ultimate stores of real wealth.