“There are many regularities in nature. After winter comes spring. After the night comes the day,” said investment expert Arkadiusz Sieroń, saying that after the Fed’s tightening cycle, a recession came. According to the expert, this month the Fed will likely end quantitative easing (QE) and raise the fed funds rate. Will this development trigger the next economic crisis? Arkadiusz Sieroń’s search for an answer to this question and his predictions for gold prices, in his own words. cryptocoin.com We have prepared for our readers.
A historical perspective on the effects of Fed rate hikes
It’s more nuanced of course, but the basic mechanism remains pretty simple. Cuts in interest rates, holding them too low for a long time, and asset purchases (aka easy money and cheap money) lead to excessive risk-taking, investor complacency, boom periods and price bubbles. On the contrary, interest rate hikes and withdrawal of liquidity from markets (ie tightening monetary policy) trigger economic collapses, bursting asset bubbles and recessions. This is because the amount of risk, debt and bad investments is too high.
Historians lie, but history never does. The chart below clearly confirms the relationship between the Fed’s tightening cycle and the state of the US economy. As you can see, in general, increases in interest rates precede all recessions. For example, in 1999-2000 the Fed increased interest rates by 175 basis points, causing the dot-com bubble to burst. Another example: In the period from 2004 to 2006, the US central bank increased rates by 425 basis points, which led to the bursting of the housing bubble and the Great Recession.
It could be argued that the economic decline in 2020 was caused by the pandemic, not by US monetary policy. But in 2019, the yield curve inverted and the repo crisis forced the Fed to cut rates. So, while it wouldn’t have been this deep without the Great Lockdown, the recession would probably have happened anyway.
However, not all tightening cycles lead to stagnation. For example, rate hikes in the first half of the 1960s, 1983-1984, or 1994-1995 did not cause economic collapses. Therefore, a soft landing is theoretically possible, although previously difficult to achieve. The last three cases of monetary policy tightening have wreaked economic havoc.
What can or will the Fed do in the current environment?
It goes without saying that high inflation won’t help the Fed engineer make a soft landing. The key issue here is that the US central bank is between an inflationary rock and a hard landing. The Fed needs to fight inflation, but it requires aggressive hikes that could slow the economy and even trigger a recession. Another issue is that high inflation causes destruction on its own. Thus, even if untamed, it will already lead to a recession, putting the economy into stagflation. Please take a look at the chart below showing the US inflation date.
As can be seen, each time the annual CPI rate rose above 5%, it was either accompanied or followed by a recession. The last such case was during the global financial crisis in 2008. But the same happened in 1990, 1980, 1974 and 1970. It does not bode well for the coming years.
Some analysts argue that we are not currently experiencing a normal business cycle. In this view, recovery from a pandemic crisis is very similar to the end of post-war mobilization. So high inflation doesn’t necessarily mean the economy is overheating, and subsidies can be made without a sudden recession. Of course, the shortage of supply and pent-up demand contributed to the current inflationary period, but we must not forget the role of the money supply. Given its rise, the Fed has to tighten its monetary policy to keep inflation down. But given high indebtedness and Wall Street’s dependence on cheap liquidity, that’s exactly what could trigger a recession.
What does it mean for gold prices?
Well, the possibility that the Fed’s tightening cycle could lead to a recession is good news for gold prices, which shine the most in the economic crisis. In fact, gold’s recent resistance to rising bond yields can be explained by demand for gold as a hedge against the Fed’s mistake or failure to plan a soft landing.
Another rising implication is that the Fed will have to loosen its stance at a point where interest rate hikes lead to an economic slowdown or stock market turmoil. If history teaches us anything, it’s that the Fed is always crazy and less hawkish than it promised. In other words, the U.S. central bank cares much more about Wall Street than it is prepared to accept, and possibly inflation.
Having said that, the recession doesn’t start the day after the rate hike. Economic indicators do not indicate an economic collapse. The yield curve is flattening, but comfortably above negative territory. I know the pandemic has intensified the recent recession and economic recovery, but I don’t expect it anytime soon (at least not in 2022). This implies that gold will have to live without the support or strong expectations of the recession this year.
Contact us to be instantly informed about the last minute developments. twitter‘in, Facebookin and InstagramFollow and Telegram and YouTube join our channel!
Disclaimer: The articles and articles on Kriptokoin.com do not constitute investment advice. Cryptokoin.com does not recommend buying or selling any cryptocurrencies or digital assets, nor is Kriptokoin.com an investment advisor. For this reason, Kriptokoin.com and the authors of the articles on the site cannot be held responsible for your investment decisions. Readers should do their own research before taking any action regarding the company, asset or service in this article.
Warning: Citing the news content of Kriptokoin.com and quoting by giving a link is subject to the permission of Kriptokoin.com. No content on the site can be copied, reproduced or published on any platform without permission. Legal action will be taken against those who use the code, design, text, graphics and all other content of Kriptokoin.com in violation of intellectual property law and relevant legislation.