The Federal Reserve surprised absolutely no one Wednesday with its Federal Open Market Committee press release stating it wouldn’t be hiking interest rates. As you might expect, the gold market responded with a strong spike in price. When interest rates remain lackluster, investors will not pass up the opportunity to move to the yellow metal; obviously in the midst of a bull market. As they stock up we can also expect further spikes in the price.
Danielle Martino Booth, former advisor to the Dallas Federal Reserve, feels Janet Yellen has no idea what to do, saying, “They’re scared stiff right now.” The Fed is feeling stymied by lackluster oil prices and a Labor Market Conditions Index (LMCI) that’s been negative for six consecutive months.
Introduced by the Fed in March of 2014, the LMCI is a composite of nineteen indicators that tracks changes in the labor market such as unemployment rates, layoffs, wages, part-time work and underemployment. The Index was designed to enable the Fed to help achieve maximum employment, one of its dual mandates, the other being the taming of inflation.
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Other financial analysts are also harshly critical of the indecisive Fed policy. Bob Doll, chief equity strategist at Nuveen Asset Management claims, “[T]hey’ve been afraid of their own shadow.” David Kelly, chief global strategist at J P Morgan Funds, feels the Fed is feebly attempting to condition public expectations for a rate rise in September, paradoxically right before one of the most deeply polarizing presidential elections in U.S. history.
In so doing, our central bank is clinging as close to a zero-level rate as it possibly can, and, according to Kelly, abdicating its responsibility to stimulate the economy, “We’re setting the most important price in the world at completely the wrong level. And that is leading to a misallocation of resources all over the world. It will eventually lead to asset bubbles.”
These experts echo what we’ve been hearing from professional analysts and traders for a while now: Our economy needs a certain amount of inflation to function properly. Last month, Bill Gross, manager of the Janus Global Unconstrained Bond Fund, in an interview on CNBC’s “Power Lunch,” said an economy requires interest income to thrive. When rates are nonexistent or anemic, savers can’t earn a return on their money and are unable to invest.
It seems instead of leading the Fed is hoping to postpone stoking even a bit of inflation right now, because the initial public reaction to a rate hike will be negative. Nobody welcomes increased mortgage payments and credit card debt. Better to kick the can down the road by settling for a “signal” that we should prepare for a September rate hike. But that means two more months of stagnation—and what happens when they shy again because conditions in September aren’t perfect either?
Interestingly, one expert says gold stood to profit either way. According to Michael Armbruster, principal and co-founder at Altavest, if the Fed had made a more hawkish announcement stocks would likely have tanked, giving gold a boost. But as it stands now, with continued uncertainty and persistent absence of leadership, smart investors are proactively infusing their portfolios and retirement accounts with that certainty in the form of value-preserving tangible assets.