Internal Fed Conflict Brews While Rates Remain Unchanged

Well, another Federal Reserve meeting came and went this week with no real action. And as usual, the big news centered around what Jerome Powell & Company said and didn’t say.

For the third straight meeting, the FOMC held interest rates steady at between 3.5 and 3.75 percent. This comes as no surprise, given the uncertainty facing the economy as the conflict in Iran drags on.

The official FOMC statement noted that inflation is elevated, in part reflecting the recent increase in global energy prices.

The cost of the basket of goods the BLS uses to calculate the CPI rose 0.9 percent month-on-month in April. That was the largest single-month jump since the height of the post-pandemic surge in 2022. The big monthly rise in prices pushed the headline annual CPI to 3.3 percent. The last time it was that high was March 2024.

The surge in CPI was almost entirely due to skyrocketing energy prices. The energy index rose 10.9 percent month-to-month. That was driven by a 21.2 percent monthly increase in gasoline prices.

The Fed also said that developments in the Middle East are contributing to a high level of uncertainty about the economic outlook.

In fact, most observers think the central bankers will hold rates steady in the near-term, despite the market’s desire for rate cuts.

Powell seemed to confirm this perception, but also tried to minimize expectations of a rate hike, signaling a patient stance for the time being.

So, the thought today is the central bank will keep rates higher for longer to battle potential price inflation due to the energy shock from the war in Iran.

Gold and silver have struggled to gain a footing since the conflict began due to this perception. Because gold and silver are non-yielding assets, they face headwinds when rates rise.

However, the interest rate hawks seem to be ignoring the proverbial elephant in the room – the debt black hole.

The Fed has addicted the economy to easy money, incentivizing billions of dollars in debt.

The Fed pumped nearly $9 trillion in new money (inflation) into the economy through quantitative easing alone from the onset of the Great Recession through the pandemic. That’s on top of the inflation it created with nearly a decade of zero percent interest rates.

That monetary malfeasance has consequences. It created a massive debt bubble, along with all kinds of malinvestments in the economy. The full impact hasn't manifested yet.

So, why don’t they hike? Given the stubbornly high CPI and the looming trickle-down effects from $100-plus per barrel oil, it would be hard to dispute such a move.

Well, it’s because they know that rate hikes would run a dagger through the heart of this debt-riddled bubble economy.

And that’s the Catch-22. The Fed simultaneously needs to hike interest rates to fight inflation and cut them to rescue the economy.

It obviously can’t do both.

To date, the central bankers at the Fed have been trying to walk the tightrope. But at some point, economic realities will force their hands. They’ll have no choice but to cut aggressively when the bottom falls out of the economy. The oil price shock could cause that sooner rather than later.

Our view at Money Metals is that America faces a protracted period of stagflation. And you might want to hold onto your inflation hedges, especially physical gold and silver.

In other news, the Bank of Russia has sold 22 tonnes of gold so far this year to help fill the government’s growing budget hole. At the current gold price, that amounts to roughly $3.4 billion.

According to official data reported by the Moscow Times, Russia’s gold reserves fell by 0.7 million troy ounces to 74.1 million troy ounces as of April 1st, reflecting the Bank of Russia’s selling.

The war, along with falling oil and gas revenues, has strained the Russian government’s budget and they are selling gold to help finance budged deficits. Turkey also sold around 60 tonnes of gold in February and March to backstop the lira and cover their rising costs of energy.

Russia put itself in a position to deal with the current budget crisis years ago. The Bank of Russia launched a gold buying spree beginning in 2014. Over the next six years, the Russian central bank increased its reserves by around 40 million ounces (1,244 tonnes).

During this period, the price of gold ranged from $1,100 to $1,500 an ounce.

When the Ukraine war began, Russia held about half of its reserves in dollar, euro, and pound sterling assets. The other half was in yuan and gold, which remain accessible.

The Russians also made a shrewd move before the invasion of Ukraine, transferring their National Welfare Fund holdings into yuan (60 percent) and gold (40 percent).

Russia’s recent selling reveals just why central banks hold gold. It serves as a long-term reserve free from counterparty risk. And since its value is recognized around the world, it can serve as an emergency fund – even if you’ve been locked out of the global dollar-dominated financial system.

Let’s take a look at the weekly trading action in the metals.

Gold is down for the second consecutive week, off 1.4% to check in at $4,654 an ounce. Silver meanwhile has been on a bit of a heater here for the last couple of days after struggling at the start of the week. The white metal is now in positive territory, showing a slight 0.5% gain since last Friday’s close to trade at $76.80 an ounce as of this Friday late morning recording.

As for the PGMs, platinum is off 0.6% to trade at $2,013 an ounce. And finally, palladium is the biggest winner among the precious metals this week – it is up 2.7% to trade at $1,552.

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