Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

The Fed's Rate Hikes Are Anything But ‘Neutral’

By Stefan GleasonMarket OverviewAug 01, 2022 04:49PM ET
www.investing.com/analysis/the-feds-rate-hikes-are-anything-but-neutral-200627920
The Fed's Rate Hikes Are Anything But ‘Neutral’
By Stefan Gleason   |  Aug 01, 2022 04:49PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

With last week’s second 75 basis-point rate hike, the Federal Reserve claims it has achieved a “neutral” monetary policy stance. That would mean, in theory, that interest rates are neither stimulating nor restraining the economy. Fed Chairman Jerome Powell said,

"Now that we're at neutral, as the process goes on, at some point, it will be appropriate to slow down,”

Powell effectively told markets he intends to pivot away from inflation fighting. Yet inflation continues to run hot even when measured by the Fed's preferred gauge.

The Personal Consumption Expenditures price index came in at 6.8% in Friday’s Bureau of Economic Analysis report.

A Fed funds rate that currently stands at just 2.5% doesn’t look “neutral” at all when the official inflation rate is running at 6.8%.

Former Treasury Secretary Larry Summers accused Federal Reserve officials of “wishful thinking” about inflation. Summers told Bloomberg,

“Jay Powell said things that, to be blunt, were analytically indefensible. There is no conceivable way that a 2.5% interest rate, in an economy inflating like this, is anywhere near neutral.”

Left unsaid by Summers and Powell is that the slowing economy and highly leveraged financial markets cannot take much more rate hiking without collapsing. That’s why the Fed is signaling it will wind down its tightening campaign – before achieving any victory over inflation.

In the face of four-decade highs in inflation, monetary policy has gone from ultra-accommodative to slightly less accommodative. It likely will never get to a genuinely neutral level – at least not for any prolonged period.

The financial system and the U.S. government (the world’s biggest debtor) need interest rates to continue to be suppressed. Negative real rates enable borrowers to be bailed out over time by rising inflation and rising nominal asset values.

Over time, negative real rates also put upward pressure on precious metals markets.

Gold and silver prices lost ground when the Fed started talking tough on inflation. But they rebounded last week when central bankers dialed down expectations for future monetary tightening.

The Fed is anything but neutral when it comes to crafting monetary policy. Central bankers inevitably pick winners and losers when they manipulate interest rates and pump liquidity into the financial system.

The winners of Fed policies are typically Wall Street investment bankers and Washington, D.C. politicians. And so are the holders of tangible assets financed with debt.

The losers are savers and pensioners on a fixed income who don’t receive earnings that keep pace with inflation; and workers whose wages never get them ahead of rising costs of living.

It is possible, however, for individual investors to position themselves on the winning side of Fed policy decisions.

During some economic cycles, it pays to be in stocks. During others, it’s far more profitable to be in assets that benefit from the unintended consequences of the Fed’s inflationary policies.

As the U.S. economy heads into recession, conventional stocks are vulnerable. Meanwhile, demand for safe-haven alternative assets combined with ongoing inflation pressures could provide a big boost to undervalued gold and silver markets.

The Fed's Rate Hikes Are Anything But ‘Neutral’
 

Related Articles

Al Brooks
S&P 500: Bull Leg In Trading Range? By Al Brooks - Aug 15, 2022

S&P 500 E-mini futures continues the strong rally up, with fourth consecutive bull bar, and likely to test the May 4 high and bear trend line. The move up is strong enough for...

The Fed's Rate Hikes Are Anything But ‘Neutral’

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email