The Federal Reserve upsets everything: rates will remain low even if US inflation exceeds 2%.
The Fed must allow Americans to work and it must help those most affected by the pandemic. To do this, it must keep rates very low even with high inflation. In this way, commercial banks are allowed to continue to receive money from the Fed itself on favorable terms, then disbursing it through loans with equally favorable terms to the most affected people. There’s one problem, however: inflation scares investors…
Low interest rates even with US inflation over 2%
Total upheaval for the Federal Reserve. After the annual meeting held as usual in Jackson Hole, the Fed – cornered by a rather anomalous situation – has decided to make a very strong decision. The US Central Bank is seriously considering keeping rates low even if US inflation rises above 2%, which is what the Fed hopes will happen.
The rates we are talking about in this case are the so-called “refinancing rates”. Refinancing rates are the interest rates that commercial banks must repay to the Fed within a specific period of time (usually within a week, but often even longer) following a loan that the Central Bank itself disburses in favor of the bank. For example, if Bank of America takes a $1 billion loan from the Fed and the rate is 0.20%, Bank of America must return $1 billion 2 million to the Fed within a week. In that week, however, Bank of America will put in place a lot of strategies and plans to make money from it.
Such a low rate means that the bank can provide loans to households and businesses at an equally convenient rate (albeit greater than 0.20% and this is one of the bank’s sources of income, for example), stimulating the economy.
The pros and cons of US inflation of over 2%
The Fed on behalf of its president Jerome Powell has said that inflation in the United States is too low and this is a serious danger to the US economy. With low inflation, those who produce will be significantly impoverished, since they will have to lower prices to be able to sell, but on the other hand, their production costs will almost certainly not decrease. This means fewer taxes that end up in the state coffers and fewer hires for the business of that entrepreneur, with more unemployment around.
All future monetary policies will be geared towards increasing inflation, Powell said.
It should also be added that inflation would greatly benefit the American state since it would actually decrease the burden of American public debt, to say the least, disastrous. Indeed, an inflated public debt has less value than an uninflated public debt.
There is only one problem in all of this, however: US inflation scares investors a lot. Inflation in fact actually cuts a slice of earnings that are already meager in themselves (for example for bonds, with very low coupons and moreover also taxed at source). As a result, many people have divested of US assets in the past few days.
Gold price rises again
When investors are afraid, gold is always there to console them.
In recent days, many investors have migrated their capital to gold, which has risen again in price reaching $1970 per ounce.
It is not difficult to imagine what the trend of gold will be in the coming months with an attempt to increase inflation at all costs by the Fed. In fact, almost all investors know that the yellow metal as a safe haven does not suffer from inflation and is its main antidote. The more inflation increases, the higher the demand for gold and therefore also its price. And it is precisely towards gold that more and more capital will migrate in the coming months.