The Fed Is All-In on Inflation

Written by Jason Simpkins
Posted August 7, 2020

The Federal Reserve has two objectives: 1) promote employment and 2) stabilize prices.

Well in the next few weeks, it's going to abandon the second. 

And gold is going to surge to unforetold heights as a result. 

This isn't just some wild prediction. 

It's coming from the Fed itself. 

You see, all the way back in November 2018, the central bank announced a broad review of the strategy, tools, and methods it uses to pursue its dual mandate.

Well, that policy framework review has been concluded and will be released in the weeks ahead. 

And one dramatic shift in policy will reportedly include a pivot away from the Fed's oft-cited 2% inflation target. 

Apparently, the central bank will instead shift its focus to an inflation average, and a pledge to not raise rates until the 2% target is exceeded. 

Fed Chairman Jerome Powell himself has hinted at the shift, as have Fed regional presidents Robert Kaplan of Dallas and Charles Evans of Chicago.

Evans in particular said he would like to keep rates where they are until inflation gets up around 2.5%, which it has not been for most of the past decade.

“I am hard-pressed to think of reasons why we would need to move away from accommodative monetary policy unless inflation was well above 2% for an extended period of time, and the economy was just very different from what we are seeing right now,” said Evans. “I think it’s very important that we get inflation up to 2%."

This may seem like a matter of semantics, but I assure you it's not. 

The consequences it's going to have for your investments and your own purchasing power are very real.

“We believe that the Fed publicly would welcome inflation in a range of 2% up to 4% as a long-overdue offset to inflation running below 2% for so long in the past,” Ed Yardeni, head of Yardeni Research, told CNBC

“We remain firmly of the view that this is a deeply consequential shift, even if it is one that has been seeping into Fed decision-making for some time, that will shape a different Fed reaction function in this cycle than in the last,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.

And Priya Misra, head of interest-rate strategy at TD Securities, told The Wall Street Journal: “It is a powerful change.” 

Again, to the casual observer, this might not seem like a big deal.

After all, the core personal consumption expenditures price index, the Fed’s preferred inflation gauge, increased 0.9% on a year-over-year basis in June, the smallest advance since December 2010.

But if that's accurate and inflation is so subdued, why then is gold trading at an all-time high; poised to fly well beyond $2,000 per ounce?

Why have meat and poultry prices surged 11% since May? Why is pork up 8.5% in that time?

Beef and veal are up 20%. Egg prices are up 10%.

New car prices are up 2% year-over-year and used car prices rose 3% from June to July.

Oil prices are at a five-month high after positively cratering in the spring.

Housing prices have jumped 5% in the past year.

Is that not inflation?

Is that not the result of the $3 trillion that was conjured up by the Fed overnight?

I guess not. 

It must be a mirage.

Because the Fed says inflation is so low right now that it's got to abandon its mandate to generate more of it. 

All I'll say is if you haven't been focused on wealth preservation, now is the time to start. 

And if you think you've missed out on the gold bull, you surely haven't

Because the American public is in for a rude awakening.

Fight on,

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Jason Simpkins

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

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