It was only three weeks ago that the Fed’s tamer 25 basis point hike sent stocks flying.
The move was, to the market, a sign that an end was potentially in sight for interest rate rises.
But with the release of the meeting’s minutes overnight, that’s not looking so sure now…
What we’re starting to see is a divergence between Fed board members.
Granted, differing opinions on the pace of rate hikes or cuts are not exactly new. The whole point of the central bank is to draw a consensus from a range of options. But what clearly stood out to the market is just how divided the Fed appears to be right now.
As CNBC reports:
‘A “few” members said they wanted a half-point, or 50 basis point, increase that would show even greater resolve to get inflation down.
‘Since the meeting, regional Presidents James Bullard of St. Louis and Loretta Mester of Cleveland have said they were among the group that wanted the more aggressive move. The minutes, however did not elaborate on how many a “few” were nor which Federal Open Market Committee members wanted the half-point increase.
‘“The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way,” the minutes said.’
Dissent in the boardroom
Now, the most interesting part of this revelation, as CNBC notes, is that we don’t know how many ‘a few’ is. It could just be one or two members erring on the side of caution, or it could be a handful of dissenters insisting on a need for bigger and quicker rate rises.
Given the outspoken remarks from Bullard and Mester, I’d wager that it’s more likely the latter. But that is pure speculation on my part.
For the market and investors like yourself, it doesn’t really matter.
The bigger problem is just how at odds the two camps are. After all, whenever Jerome Powell talks, he clearly stresses the importance of avoiding recession. These minutes, on the other hand, show that others are far more worried about getting inflation under control at any cost.
As a result, I’m worried we could wind up with the worst of both worlds. Just like this comment from a ZeroHedge article notes:
‘The biggest takeaway from the Minutes appeared to be the contradiction of Fed Chair Powell’s nonchalance at the easing of financial conditions, which is in itself a hawkish shift (despite an overall sentiment gauge suggesting this was a notably dovish minutes).’
What the Fed is saying and what it’s doing are two different things.
And this, in my view, is indicative of many of the problems facing the US economy right now.
There’s a whole lot of talking, a whole lot less doing.
A US mining boom? Don’t count on it
Earlier this week, I read an interesting article on the potential of an ‘American mining renaissance’.
As Australians, it’s easy for us to understand the importance and lucrative nature of a strong mining industry. But the US hasn’t been afforded that same luxury.
Despite plenty of promising resource projects, mining is treated like an afterthought in the US. It just hasn’t received the same level of investment and support that Australia is used to.
But recent government initiatives have tried to reverse this.
Biden has been desperate to kickstart more mining in the US, a push that would help reduce the nation’s reliance on the Chinese supply chain of key commodities.
The issue is that red tape is getting in the way. As the article reports:
‘Permitting challenges are ubiquitous across American infrastructure. In fact, they’ve become outsize obstacles to modernizing and building the roads, electricity transmission lines, pipelines and mines of tomorrow.
‘Modernizing the nation’s failing infrastructure, reshoring supply chains and deploying tomorrow’s energy solutions are all dependent on building and doing so at a scale and speed we haven’t achieved in decades. But, under our current permitting regime, it simply won’t happen.’
This is what I mean when I say the US isn’t doing enough. Because while the Fed certainly aren’t the ones deciding whether a mine goes ahead or not, they are a reflection of the bigger bureaucratic mess that plagues the economy.
So, what should investors do?
Well, in the long term, I’m still fairly optimistic about what is possible in terms of growth. Beyond the market’s reach there are a lot of exciting developments.
But for the short term, hedging your bets may not be a bad idea. And if you’re looking for the best hedge there is, then gold is probably the answer.
That’s why, if you haven’t already, check out our ‘Gold Powerplay Summit’. It’s happening today at 2:00pm AEDT, and whether you’re a gold bug or not, it’s worth tuning in simply for peace of mind.
After all, with a loose Fed at the wheel, nothing is certain for markets.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
