Fed Expects No Recession as Inflation Negates Actual Economic Growth

Rate hike concerns are weighing on precious metals markets this week.

The Federal Reserve lifted its benchmark funds rate by a quarter point as expected on Wednesday. Many investors had been looking for central bankers to signal that would be the final hike of the year. But stronger than expected economic data suggest the Fed may not be done – especially with inflation still running above target.

As NTD News reports, higher borrowing costs will continue to work their way through markets and the economy.

NTD Reporter: One month after a pause, the Federal Reserve is raising interest rates once again to the highest level in more than 20 years.

Jerome Powell: We took another step by raising our policy interest rate a quarter percentage point. We've covered a lot of ground, and the full effects of our tightening have yet to be felt.

NTD Reporter: On Wednesday, Fed Chairman Jerome Powell announcing its 11th rate hike since last spring. For people looking for a home loan, this latest round of interest hikes means they'll pay more for their property. And there's no guarantee relief is coming anytime soon. Economists say more rate hikes could be ahead this year.

Economic Commentator: Inflation is still too high. The Federal Reserve is raising interest rates aggressively to slow the economy and get that inflation back down.

Following the Fed’s rate increase, the preliminary gross domestic product reading for the second quarter came in at a better than expected 2.4%. Thursday’s durable goods orders report also exceeded expectations. Meanwhile, weekly jobless claims came in on the low side.

The bullish economic headlines emboldened monetary hawks and boosted the U.S. dollar on foreign exchange markets. As a consequence, precious metals markets sold off sharply on Thursday.

As of this Friday recording, gold is more or less unchanged now on the week to bring spot prices to $1,970 per ounce. Silver, meanwhile, shows a loss of 1.3% for the week to trade at $24.56 an ounce.

Turning to the platinum group metals, platinum prices are down 2.6% to trade at $953. And finally, palladium is giving up 3.0% this week to come in at $1,298 per ounce.

This week’s price action shows metals markets still mired in the summer doldrums. Bulls will likely have to wait for more clarity from central bankers on interest rates before a sustained rally can commence.

Fed Chairman Jerome Powell said during remarks to the media on Wednesday that Fed economists no longer expect a recession to take hold. But the economy may not be as strong as official GDP and employment reports suggest.

In fact, the leading economic indicators have fallen for 15 months in a row through June. Moreover, the yield curve remains deeply inverted with long-term bonds yielding much less than short-term paper.

If the economy were truly booming, the LEIs would be pointing up and the yield curve would be normalized. Instead, they are both flashing recession warning signs.

Just as the Fed waited too long to raise interest rates while inflation was raging, it may now be hiking too late into the business cycle as higher borrowing costs crimp consumer spending and capital investment. The full effects of the Fed’s latest bump up in the funds rate won’t be known or felt for months. At that point, policymakers could already be in the process of trying to loosen monetary policy all over again.

Of course, nobody can predict when turns will occur in the business cycle or interest rates with any sort of certainty. Fed officials have proven to be dead wrong in the past ahead of major turning points in the economy and financial markets.

And investors who think they can time the market with any degree of success typically end up faring poorly. Successful investors tend to take a disciplined approach of buying and holding assets that represent good value unless and until the fundamentals for those assets change.

Right now, hard assets offer attractive relative value compared to stocks and bonds. Precious metals markets have a compelling supply and demand story, with mining production flat-lining while both industrial and monetary demand are growing.

Gold and silver also tend to fare better during recessions than the stock market. The next recession might not be officially declared this year, but it won’t be put off indefinitely. Unlike recent downturns that began while inflation was relatively mild, the next one could be accompanied by stubbornly high inflation that central bankers as of yet haven’t been able to bring down to target.

Stagflation can be brutal for investors who hold conventional financial assets. Owning physical precious metals can help make it bearable – and potentially even profitable.

In other news, Oregon Gov. Tina Kotek this week signed a sound money bill ending the state’s punitive Corporate Activity Tax on precious metals dealers and, ultimately, the state’s gold and silver investors.

Lending a hand to efforts by in-state small business owners, the Sound Money Defense League and Money Metals Exchange mobilized grassroots support and worked in other ways to secure the passage of House Bill 2073, a package of corporate activity tax (CAT) reforms and cleanups which included the exemption of precious metals sales from Oregon's CAT tax.

Legitimate gold and silver businesses operate on extremely small margins—margins that are similar in scale to brokerages, which are already exempt from the CAT. A CAT tax imposed on topline precious metals revenue is therefore extremely burdensome when compared to the taxes paid by other current CAT payers.

Furthermore, these increased costs on precious metals businesses ultimately are passed through to Oregon savers and investors.

Oregon is among the 43 states that do not directly impose sales taxes on precious metals, but Oregon's Corporate Activity Tax (CAT) had been doing this in a back-door manner. Ohio is another state that still has this draconian tax.

It's bad public policy to penalize small-time savers and investors—as well as the businesses that support them. Fortunately, the trend across the nation is to reduce the costs and obstacles in the way of preserving wealth in the form of gold and silver.

For example, Mississippi, Alabama, Tennessee, and Virginia passed legislation within the last two years to exempt precious metals-related purchases from taxation in their states. Oregon is the latest state to promote sound money by removing the CAT from precious metals dealers and their customers.

Money Metals continues to target the elimination of discriminatory tax policies that discourage precious metals ownership and thereby reduce the likelihood that citizens are able to take steps to insulate themselves from the inflation and financial turmoil that flows from the Federal Reserve System.

This is important work, and we are pleased to say that progress is being made, at least when it comes to the state level.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a wonderful weekend everybody.

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