Here’s Why You Shouldn’t Trust the Fed

Written by Jason Simpkins
Posted March 1, 2018 at 7:00PM

Gold is down and it’s because some investors — both institutional and retail — are working themselves up about interest rate hikes.

There’s a new sheriff in town — Federal Reserve Chairman Jerome Powell — and with the economy in seemingly good shape, the expectation is that he’ll immediately start jacking up interest rates.

Well, it’s not true.

And I know it’s not because I’ve watched this happen in each of the last three years.

The Fed comes out talking a big game about rate hikes and strong underlying numbers. The dollar strengthens and gold dives. Then it proceeds to drag its feet on rate hikes, gold rebounds, and the dollar scales back. The former ends the year with gains, and the latter declines.

It’s as predictable a pattern as any.

It’s so predictable, in fact, I’ve written about it before.

Here’s what I said back in October 2016:

Waaayyyy back in December 2012 the Fed said it would start raising interest rates when unemployment reached a level of 6.5%. Well, that finally happened in April 2014, when the unemployment level fell to 6.2%.

And when did the Fed actually increase the rate? December 2015, a year and a half later.

The increase? Up from a range of 0%-0.25% to a range of 0.25%-0.5%. And that's where we've stayed for the past 10 months.

My point is the Fed tends to drag its feet on these things. It over-promises to prime the market and then under-delivers.

As evidence of this fact, I pointed readers to this, the Fed’s 2014 scatter plot:

Fed Rate Forecast

This is the Fed’s own graphic. It’s in every report. Each dot represents a member of the FOMC, and their positions show where each member believes the benchmark interest rate will be over the next three years.

As you can see, roughly four years ago, the overwhelming majority of FOMC members thought interest rates would be 2% or higher in 2016.

Well, we’re in 2018 and the Fed Funds rate is still 1.25%-1.50%.

Here’s the scatter plot from February 2017…

Again we see the FOMC’s abundant optimism. In February of last year, 10 out of 15 members believed they would raise interest rates over 2% in the next 10 months.

And again, we ended the year at 1.25%-1.5%.

Now here’s the most recent plot from last month…

More rose-colored glasses, though they do seem to be getting more realistic.

The majority of members have rates well over 2%. None have pegged them over 3% like last year, but it's still pretty optimistic, considering we're two months into 2018 and haven’t seen a single rate hike yet.

Nevertheless, some analysts are out there predicting FOUR rate hikes by the time the year draws to a close.

It’s been more than a decade since the Fed raised interest rates four times in a single year. And I don’t think that’s going to change in the next 10 months. We’d have to see some pretty epic growth/inflation data to get to that point.

Is that possible?

Sure. But it’s not terribly likely.

So what’s probably going to happen is the same thing that happened last year, and the year before. The Fed and some of the more bearish analysts will talk up rate hikes, causing a shift from gold to the dollar. That’s what we’re seeing now.

This trend will likely crescendo early in the year, when the FOMC finally acts and boosts interest rates to 1.5-1.75%. But then, in the weeks and months after, the market will realize it overreacted. We’ll be in line for just one, possibly two, more hikes by the end of 2018, and set to finish a shade over or under 2%. By then, the impetus for more rate hikes will have abated.

And finally, as that reality sets in, gold will rebound, and the dollar will retreat just like it did in 2017.

Remember, the Fed raised rates three times last year, and what happened?

Gold rose 15% and the dollar dropped 10%.

So don’t get carried away in all the bluster about interest rates. They’re never as drastic or as bad as people think.

And don’t lose faith in gold.

Fight on,

Jason Simpkins Signature

Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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