The Fed has been laying the groundwork of late as to its plans for removing stimulus tools. The central bank is very unlikely to allude to such removal at its Jackson Hole, Wyoming symposium this week, but it could provide additional clues that such a move is coming perhaps sooner than anticipated.
The Fed appears willing and ready to continue to signal to markets that the initial taper is coming before the end of the year. An announcement at this week’s symposium seems a bit too soon, however, for Chairman Jerome Powell to announce any concrete plans on how the Fed plans to remove its stimulus.
It is no secret that the Fed’s actions have likely been a major catalyst for higher stocks and risk assets. Some analysts have suggested a very widespread and overreaching effect of QE, and have suggested that without such measures the markets would have melted down long ago. Whether or not quantitative easing has had a major impact on equity markets remains the subject of considerable debate. Whatever the case may be, it seems as if markets will soon learn whether QE was the equity crutch many have suggested it to be. If that does prove to be the case, equity markets could be in for a wild ride. As investors head for the exits in significant quantities, the gold market could stand to benefit handsomely as the search for alternatives intensifies.
The taper tantrum of several years ago is a primary example of how markets could react once the Fed does begin to take its foot off the gas pedal. The Fed is likely to begin cutting a bit of its assistance at a time, taking its $120 billion per month lower and lower until it reaches zero. The central bank could then look to begin hiking its key interest rate which still stands at zero today.
The removal of the punchbowl may be more market negative for what it signals than for what it actually removes. The markets like cheap, easy money, there’s no doubt about it. Cheap money allows businesses to borrow at a low cost. These loans can be used for various purposes, although hiring and expansion may be the biggest. Without low cost capital being available, many businesses may have to think twice about expanding, with many holding off due to the higher cost of capital. This can have major ripple effects through the economy, even causing the economy to go into recession if it becomes widespread enough. The Fed, therefore, will have to weigh the risks of an economic slowdown against the risks of inflation.
The inflation genie seems to already have been let out of the bottle. Higher prices and rising price pressures may be something that markets are forced to deal with on an ongoing basis, regardless of whether the Fed keeps rates at zero or raises them to several percent.
The hold the Fed now finds itself in may make now the ideal time to stock up on gold and hard assets. With tough times potentially ahead, now is the time to take protective action for your portfolio. There may be no better asset class to turn to than gold.