The Nobility of Central Bank Action

June 30, 2023

The Federal Reserve has made it clear that its intention to get interest rates up to a higher level is a work in progress; and that investors and consumers shouldn’t assume otherwise.

Speaking before the House and Senate Banking Committee, Chair Powell said that still higher rates were needed to fight inflation and to expect more increases this year.

Powell’s testimony to that effect plus other statements and indications come on the heels of the highly anticipated pause in the current rate hike cycle that was announced last week.

European central banks didn’t bother with the “pause that refreshes”. The Bank Of England, Norway, Turkey, and Switzerland announced additional rate hikes, reaffirming their intentions to stay the course.

It is interesting to note that any direct announcements about rate hikes, as well as media reports and references to those hikes nearly always use a tag line such as “in order to fight inflation”, “to counter high inflation pressures”, “to bring inflation down”.

Specifically, Chair Powell said it was a “pretty good guess” that the central bank would hike rates twice before the end of the year and that “Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go”.

The statements seem to imply that the actions are necessary and noble. Are they?

THE FED’S FIGHT AGAINST INFLATION

It is assumed by most, I think, that the Fed is doing what it thinks will help moderate the unusually high increase in consumer prices that have occurred over the past couple of years; and lower the expectations for more of the same.

Quite frankly, that does sound somewhat ‘noble’. By characterizing the Fed’s efforts as a fight against inflation, the narrative sounds more like “The Fed is a knight in shining armor and inflation is the dragon they intend to slay”.

THE FED GETS RELIGION

For nearly four decades, the Federal Reserve had pursued a policy of lower interest rates. After approaching and toying with near-zero rates, long-term threats to U.S. dollar stability and stature became very short-term and immediate.

The inflammatory environment for the dollar required something starkly shocking – IF the dollar could be saved.

The past fifteen months indicate a possibility that progress is being made. Realistically, the U.S. dollar is stronger, even in the face of unrelenting political pressure; and the effects of inflation have moderated somewhat. But…

IS THE FED REALLY “FIGHTING INFLATION”?

No. The Federal Reserve is not fighting inflation. It is doing nothing to stop it.

Inflation is the debasement of money by government and central banks. Inflation is intentional and ongoing. All governments inflate and destroy their own currencies.

If the Fed were serious about stopping inflation, it would stop expanding the supply of money and credit.

Do not look for that to happen for two specific reasons:

  1. Inflation (expansion of the supply of money and credit) is the lifeblood of the banks. Banks create money and lend it in perpetuity for the purpose of collecting interest.
  2. Stopping expansion of the supply of money and credit would result in financial and economic collapse.

WHY IS THE FED RAISING INTEREST RATES?

If the Fed isn’t interested in stopping inflation, why are they raising interest rates?

The Fed, while not likely to admit it straight out, is fighting to support the U.S. dollar – out of necessity. I think they hope that by raising the cost of credit that the resulting economic effects will show up in a stronger U.S. dollar.

The path is fraught with danger, though.

WHAT YOU NEED TO KNOW

  1. The Federal Reserve is not “fighting inflation”; they are raising the cost of money and credit.
  2. The Federal Reserve is ‘fighting’ the effects (cheaper dollars, higher prices) of its own inflation.
  3. The Federal Reserve has been intentionally practicing inflation since its inception in 1913.
  4. The Federal Reserve acts primarily in its own interest.
  5. Interest rates were at historically low levels because of Federal Reserve policy.
  6. Interest rates could go much higher just to reach what might be considered reasonably normal on a historic basis.

WHAT TO EXPECT 

  1. Higher interest rates.
  2. Credit problems and bankruptcies
  3. Slowdown in economic activity.
  4. Recession or worse.

Some investors seem too eager to get back in the water. Please be aware that there are sharks in the water and there is no lifeguard on duty.

The Federal Reserve is a banker’s bank. Besides acting in its own self-interest, it has played the game with changing interest rates numerous times. Any success comes only after too much damage has been done. 

We are currently in the early stages of another Fed-spawned financial crisis which could blow up the world economy. Let’s hope not; but don’t act surprised. You’ve been warned.

by Kelsey Williams for Neptune Global

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Neptune Global is a full service precious metals dealer serving individual investors, the wealth management industry, broker dealers and institutional investors. The firm’s platform of investment bullion includes all forms of traditional physical precious metals in conjunction with innovative physical precious metal investment assets which provide unparalleled diversification, transparency and liquidity. Their leadership in the market is documented with such official designations as being the recipient of a US Patent for the PMC Ounce (Precious Metals Composite). While dynamic offerings such as the PMC Ounce provide investors with many of the conveniences and benefits generally associated with mutual funds and ETFs, all of Neptune Global’s product offerings remain true to the firm’s core convictions related to the time tested value ascribed to physical precious metals ownership.


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