Hawaii Six O - Gary Wagner
Powell’s partial truths “A big part of inflation is related to the pandemic”
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The partial truth and nothing but the partial truth is a realistic way to characterize some of the statements made by Chairman Powell during an interview he held today with billionaire David Rubenstein. One of his statements that made many economists uneasy was, “A big part of inflation is related to the pandemic”. Powell’s statement was 100% truthful, however, not the whole story.
The reason inflation ran to a 40-year high forcing the Fed to raise rates at every FOMC Meeting from March to December 2022 and the Fed's intent to keep rates elevated throughout 2023 had less to do with the pandemic and more to do with one of the greatest blunders by the Fed in recent history. Everything contained in the current monetary policy is based on fixing an error to correct its mistake; letting rates run to 8 ½% before they raised rates.
Assuming that inflation was transitory and would ease naturally is why the Fed did not act, this caused inflation to peek at 9.1%. Had they acted when inflation was at 1.7% in March 2020 or 2.6% which occurred in May 2020, inflation could have been effectively controlled with a series of small rate hikes taking the Fed’s benchmark rate to 2 ½% equaling the rate of inflation during that time?
Historically speaking every bout of major inflation had the same reaction by the Federal Reserve which was to raise interest rates to just below or above the current level of inflation.
Although the challeges the fed faced was unforeseeable, this black swan event occurred for the 1st time in the modern age. The Fed had no historical model to deal with it. They did however have models from multiple period of high inflation.
But the did not follow the path of former Fed officals that tacked and reduced high inflation. In inflation periods like 1979 -1981, or 2008 the Fed did raisedrates to approximately inflation level. Rather they late inflation climb to 8.5% before the first rate hike in March 2022. This created a cascading dilemma where inflation peaked at a 40-year high.
Therefore the Fed has been in crisis mode correcting its fatal misstep. This is the primary component that forced the Fed to transition to the aggressive policy in place now. It is correct because it is the historical model that has worked by Federal Reserve officials successfully.
At the last economic symposium held at Jackson Hole this year Powell said, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” Powell knew that outcome was an inevitable outcome that the Fed created.
Recent action by the Fed could provide an opportunity for gold investors. A dip in gold pricing has not been an option during this rally. At best gold investors will have a needed price decline because this correction will conclude by turning bearish sentiment bullish.
Our technical studies indicate that if gold prices continue lower two price points are possible allowing traders to buy the dip. Both price targets are based on Fibonacci retracement levels. The data set used to obtain these level begin at $1719 and up to $1980.The first target is $1846 a 50 % fib retracement, and the 2nd target is based on the 61.8% fib retracement of $1816.
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Wishing you as always good trading,