Last week, the U.S. Federal Reserve raised interest rates by 25 basis points in a move that was not unexpected. The central bank also reiterated its plans for one more hike this year as well. December would seem to be the likely target, although another move in September is certainly a possibility.
Looking forward, the subject of inflation will certainly play a role in any decisions made by the Fed regarding monetary policy. Although the central bank has maintained its slightly hawkish stance, that hawkishness could give way to further dovishness as inflation remains extremely elusive.
Take a look at last week’s latest reading on consumer prices to see just how difficult it has been to spur rising inflation. It was reported last Wednesday that the Consumer Price Index saw a rise of -.1% month-over-month while the core inflation reading year-over-year showed a rise of 1.7%. These figures are still below the Fed’s desired target of 2% annual inflation and could be characterized as “soft.”
Specific fundamental cost areas were weak, with education, communication, health care and energy all posting declines.
You have to wonder just how aggressive the Fed could possibly be given these weak inflation figures. In fact, the ongoing lack of inflation could even begin to raise questions about another hike being seen in 2017.
Some could even potentially argue that the Fed is simply raising rates only to have the ability to lower them again at a later date.
Yes-stocks are moving higher. Yes-the economy has shown some signs of improvement. Yes-there could potentially be legislation passed by the Trump administration that could boost economic growth.
But…The stock market could be considered ‘extremely .long in the tooth” at current levels. No major legislation has been passed thus far. The risk of recessions seems to be on the rise. Add to these issues the numerous geopolitical factors currently being faced around the world and the possibility for a nasty stock market correction along with a major economic slowdown exists.
It would seem to be a question not of “if” but of “when.”
The gold market has shown some impressive resilience in the face of a stronger dollar, higher rates and higher equities. The yellow metal could potentially see significant inflows once the bull market in stocks reverses course.
That is likely a primary reason gold has remained in “buy the dips” mode for some time now. The market may, however, be knocking on the door of a major upside breakout that could potentially see prices sharply higher in the months and years ahead.
Taking a long, objective look at the economy and global backdrop, it is difficult to imagine a scenario in which rates see any dramatic moves higher in the coming months and even years.
In fact, the global economic landscape may remain on the soft side for a long time to come. As central banks scramble to fight deflationary pressures, they will likely be forced to use the tools available to them to fight the slowdown i.e. lowering interest rates and balance sheet expansion.
Such an environment could be conducive to drastically higher gold prices, weakening currency values and lower stock markets around the world.