Fed Chairman Doubles Down On Loose Money As Inflation Rages

Precious metals markets are rallying on some early Friday remarks from Jerome Powell. The Federal Reserve chairman is speaking at the Jackson Hole virtual gathering of central bankers Friday and Saturday, and he started off by emphasizing the view that high inflation readings will come down soon.

There is still a question of whether anything has changed since the last Fed policy meeting. There, Fed officials had suggested they may soon begin tapering their asset purchases.

Something that could give the Fed’s money masters an excuse to back down on tapering is the recent global surge in COVID cases linked to the Delta variant.

Some countries including Australia are back in full lockdown mode. In the United States, mask mandates are back in many of the more authoritarian jurisdictions and vaccine requirements are increasingly being imposed by businesses and local governments.

Just a few weeks ago, President Joe Biden had touted the vaccine as a ticket to freedom from mask mandates. Now his team of government health bureaucrats is telling everyone to wear masks, calling for more contact tracing, and warning that additional vaccine booster shots will be necessary.

The risk is that the virus keeps mutating to thwart every effort aimed at achieving herd immunity. But optimists on Wall Street are pricing in a robust economic recovery to continue in spite of the threats from the virus and Fed tapering.

It’s unlikely the central bank will get very far into tapering if Wall Street decides to throw a tantrum. The Fed may also face pressure from the big-spending Biden administration to reverse course and ramp up its bond purchases.

Given the political realities, capitalist and commentator Steve Forbes argued in his latest “What’s Ahead” commentary that tapering will likely be short lived.

Steve Forbes: Now, concerning tapering, every month, the Fed has been buying $120 billion of government bonds and mortgages. Thanks to COVID-19 stimulus bills passed by Congress and money previously created by the Federal Reserve out of thin air, the financial system today is awash in liquidity. Corporations hold trillions in cash, banks are loaded with lendable funds, consumer checking accounts are at record levels.

Given all this, the continuation of the scale of the Fed's bond-buying should be fueling far worse inflation than what we've been experiencing. This gets to the fact that the Fed will not be in control of its destiny if Congress passes President Biden's humongous spending bills. The central bank will face irresistible pressure to buy bonds to help finance this extravagance.

If investors are overestimating the Fed’s ability to rein in liquidity, then they may be underestimating inflation risk and undervaluing precious metals. Gold and silver markets have lagged this year but are showing signs of gathering strength in recent days.

Precious metals markets have been basing out during these summer months. While the price action has been frustrating for bulls, it may ultimately be healthy for the long-term bull market outlook. The bigger the base, the bigger the directional move that can follow.

An investor rush into gold and silver for protection from inflation, negative real interest rates, and systemic risks in financial markets remains to fully play out.

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