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Gold Analysis – The Federal Reserve will speed up its monetary policy to lower inflation

Gary Wagner  |  April 12, 2022

"Why is inflation rising?

More alarming is the fact that, according to many analysts and Federal Reserve members, inflation it will continue to rise before falling to acceptable levels.

The most current data comes from a study by the Federal Reserve Bank of Cleveland with forecasts on inflation levels for March, as well as a forecast on inflation levels for the first quarter of this year. Their studies indicate that inflation in March could reach 8.41% yoy. They also predict that the inflation level for the first quarter of 2022 could reach 9.1%.

To say the Federal Reserve is behind the curve would be an understatement. The current level of inflation did not start overnight and has been steadily increasing since 2020. It is the direct result of the actions of two primary factors of the administration and the actions of the Federal Reserve.

The administration has allocated huge amounts of capital to address the economic downturn and recession that have been the byproduct of the global pandemic. Trillions of dollars have been earmarked for aid to people in need, and the huge rise in American unemployment resulted from business disruption during the pandemic. According to “TruthinAccounting.org”, the public debt published by the United States is currently approximately $ 30.5 trillion.

However, according to this publication, the national debt in the United States is much higher, with their estimates at $ 141.461 trillion. The chart above visually illustrates the assets of the US government and its liabilities. He concludes that our actual national debt, which was created using data from the US Treasury Department and Social Security and Medicare administrators, is actually $ 142 trillion.

The second major force that created the current level of inflation has been the huge allocation by the Federal Reserve buying assets consisting of US debt and mortgage backed securities. At present, the Federal Reserve has over $ 9 trillion in assets that it will begin to relax as a major component of its tightening plan to its current monetary policy to coincide with rate hikes for the rest of the year.

What can the Federal Reserve do to reduce inflation?

Although the administration is no longer providing huge capital in terms of aid packages, it is now up to the Federal Reserve to attempt to undo the current level of inflation that has taken years to create. Their first step was to reduce the monthly asset purchases that were completed earlier this year. The second step was to start raising the Fed Funds interest rate.

The first rate hike occurred at the last FOMC meeting, raising interest rates by ¼%. The Federal Reserve will likely continue to raise rates in each of the remaining six FOMC meetings this year. The Federal Reserve’s last step will be to reduce assets on its balance sheet.

Fed Governor Lael Brainard, in a speech written for the Minneapolis Fed discussion, said the Federal Reserve will present a plan “at its May meeting to reduce some of the nearly $ 9 trillion in assets, mainly Treasuries and mortgage-backed securities, on its balance sheet. ”He added that they expect to reduce their balance sheets at a“ rapid pace ”.

“The [FOMC] it will continue to methodically tighten monetary policy through a series of interest rate hikes and start reducing the balance sheet at a rapid pace as soon as our May meeting. Given that the recovery was significantly stronger and faster than in the previous cycle, I expect the budget to shrink significantly faster than the previous recovery, with significantly higher ceilings and a much shorter period for the gradual introduction of the ceilings than in the previous cycle. to 2017-19. “

Fundamental analysis of gold

His speech today had a huge impact on the financial markets across the board. In case of gold the price that was trading at a high of $ 1948.90 prior to the release of a written speech sold at a rapid pace bringing gold futures to a low of $ 1920.90. As of 5:30 pm EDT, the June 2022 Gold Futures Contract is currently trading down $ 7.40 and set at $ 1926.60.

The chart above is a 10-minute candlestick chart illustrating the pace at which gold was sold immediately following the statement by Federal Reserve Governor Lael Brainard. Lael Brainard, considered a more accommodating member of the Federal Reserve, acknowledged that the central bank must act quickly and aggressively to reduce inflation.

The problem is that the Federal Reserve has waited too long before revising its monetary policy to deal with a multi-year rise in inflation. The more aggressive steps currently planned by the Federal Reserve will almost ensure that a “soft landing” is virtually impossible.

In other words, the fallout from the Federal Reserve, which aggressively tightened its monetary policy, is sure to cause a contraction of the US economy. Finally, the Federal Reserve cannot ease the current inflation level that has taken years to build in a short period of time, as President Powell said at his latest press conference."

 

Read the full article on: Columbus in Line

 
 
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