The Fed Gives Us a Golden Dove Bar
I’ve discussed the Federal Reserve’s abrupt about-face on monetary policy previously in multiple Wealth Watch editions, but their latest move is a real game changer.
Especially for gold.
On Wednesday, the Fed ended its latest two-day policy meeting with the usual press release. But what they had to say was both unexpected and surprising.
The Fed went beyond even the market’s most bullish expectation.
Not only did they signal no more interest rate hikes this year but even indicated a rate cut could be the next move. If that wasn’t surprising enough, the Fed also said it would halt its balance sheet runoff.
As a Quick Refresher
The Federal Reserve drastically increased the size of its balance sheet (and the U.S. monetary base) in the aftermath of the global financial crisis in 2008.
Pre-crisis, the balance sheet was just over $800 billion and had been growing only modestly for years.
Post-crisis, the Fed’s balance sheet blew up to $4.1 trillion, a staggering fivefold increase in the monetary base in just a few years!
Now, fast-forward to 2017. This is when the Fed decided to rein in all this easy money sloshing around the U.S. economy.
The plan was to let U.S. Treasury securities held by the Fed “run off” the balance sheet as they matured, thus reducing the monetary base back to “normal.”
The Fed also set a timetable for accelerating its balance sheet reduction incrementally over time.
Well, That Didn’t Last Long
This week the Fed said: Never mind.
It would reduce the pace of balance sheet runoff in May and end it altogether in September. Plus, starting in October, the Fed plans to become a net buyer of U.S. Treasuries again, to the tune of $20 billion per month!
As mortgage-backed securities held by the Fed mature, the Fed plans to replace them with newly purchased Treasury securities.
That means quantitative easing is back!
Far from reducing the bloated U.S. monetary base, the Fed plans to hold it steady around $3.8 trillion, a 375% increase since 2008!
The bloated U.S. money supply hasn’t completely found its way into circulation in the real economy just yet; $1.6 trillion of it is held by banks as excess reserves parked at the Fed.
But there is still plenty of easy money sloshing around today. It’s like gasoline in search of a match and the Fed decided to keep the money supply flammable for a while longer.
Sooner or later the likely result will be accelerating inflation, and that will certainly light a match under the price of gold.
Which is all the more reason why I suggest adding some of the yellow stuff as a hedge against the Fed.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch