The markets and investors are still digesting Wednesday’s FOMC meeting announcement. The Fed now has plans to taper quicker, and its monthly security purchases could be at an end by March of 2022. The Fed also alluded to multiple interest rate hikes, suggesting that it is looking at three quarter point hikes for next year. Given recent employment data, the Fed must feel it has good reason to adjust its policy and take a more aggressive approach. The Fed may also simply realize how far behind the inflation curve it has already fallen and may feel the need to act and act now to try to quell the rapid rise in prices being seen.
Whatever the Fed;’s thinking is, the economy is still showing signs of strength. New weekly jobless claims last week were slightly higher, but kept the amount on trend for tightening labor market conditions. Recent manufacturing data rose to a three-year high in NOvember while home building hit an eight-month plateau. All key data points are looking at more improvement in the coming year, and that economic strength may give the Fed more reason to tighten.
The Fed must walk a tightrope, however, as it looks to tighten policy without strangling economic activity. Although three quarter point rate hikes may send the economy back into recession, the central bank likely lacks any additional room to raise rates further. Three rate hikes next year would still keep the Fed Funds rate under 1% which may be a very far cry from where rates need to be to contain rising inflation. The period of massive inflation seen in the 1980s took interest rates to 20%, a level which certainly would not be tolerated by investors or markets at this point. Some analysts have suggested that a Fed Funds rate of 1.5% would likely act as the breaking point, and anything higher than that would cripple the economy and even spur a recession.
Of course, time will tell if the economy remains on its current hot streak. With the ongoing Covid-19 pandemic and the new variant spreading rapidly, it is impossible to tell how the economy and markets may be affected in the months ahead. Certain areas of Europe are already closing their borders once again. A full scale closure in major European cities and U.S. cities would likely change the Fed’s thinking and could keep rates from rising too far too fast, or possibly at all. Not only could the viral pandemic keep pressure on markets and the Fed, but so too could inflation and dollar weakness.
Despite recent market hiccups and despite the Fed possibly raising rates from the zero level, the gold market is still likely to see a bright future. For the patient, long-term investor, gold’s recent trading range could be an excellent place of value to buy for the long run. The Fed has backed itself into a very tight corner, and regardless of what it does or does not do with policy, the outlook for gold is as bright as ever. That makes right now the ideal time to buy physical gold as current prices may not be seen again once the market sees liftoff.