SEMI-MONTHLY FISCAL/MONETARY REPORT – FED CHAIRMAN POWELL SPEAKS, THE BIG NEWS IS NOT WHAT YOU’VE HEARD!
The general capital markets were strong in August, both equity and fixed income, as the Fed continues to keep interest rates close to zero and grow the money supply at a double digit rate, M2 running at +24% annualized. Gold related assets gave back hardly any portion of the year’s gain, even though, with a very strong stock market, there was no obvious short term need for gold as a presumed “safe haven”. Gold bullion was down 0.3% in August, gold mining stocks down a touch more. For the year, gold bullion is up almost 30%. The gold mining stocks are up more than that as investors are beginning to allocate a portion of their assets to the precious metal sector. Our update from two weeks ago describes the value based appeal of gold mining stocks, and how their value has substantially lagged the increase in the price of gold bullion. As we have said before, this is the very early stage of the resumed bull market in gold related assets.
There has been a number of fiscal/monetary developments within just the last week, none larger than the enlarged role of the Fed Reserve, embedded in the commentary of Chairman Powell last Wednesday.
JEROME POWELL DESCRIBES THE FED’S THIRD MANDATE !
Chairman, Jerome Powell’s, speech last week summarized the country’s tenuous financial condition, the Federal Reserve’s approach to dealing with the situation, and, most importantly, a revised view of their long term role. Recall that the Federal Reserve was established in 1913, with the primary role of maintaining stable prices while managing the US money supply to alleviate or avoid the financial panics that precluded the Fed’s creation. In the late 1970s, during a period of high unemployment and high inflation (“stagflation”), Congress broadened the Fed’s responsibility, creating the “dual mandate” of (1) encouraging stable prices and (2) maximum employment, at the same time promoting moderate interest rates. It is on this basis that the presumably apolitical Fed has become increasing important to the US capital markets and the economy as a whole over the last four decades.
Powell’s much anticipated speech expressly described how the previously described 2% annual inflation target (which destroys about 50% of your purchasing power over 30 years) is now to be considered an “average long term” target. This means that if the inflation rate has been running below 2% for a period of time, the Fed will be tolerant of a range above 2% for a similar time. This was presumably the BIG NEWS. This should not be news to our followers. In August, 2019, we started writing about all Fed governors invariably using the word SYMMETRICAL when describing the 2% target, and we explained what that means. How much above 2% is tolerable, and for how long, is uncertain, and can the Fed even control these parameters once the inflation genie is out of the bottle ? Only time will tell !
THE REAL NEWS: A third mandate is coming. As Powell described it, for the first time publicly, a broad review of economic conditions was put in place, including events called FED LISTENS. Community groups, apparently something like “town halls” talked to Fed representatives around the country, involving “a wide range of participants—workforce development groups, union members, small business owners, residents of low and moderate income communities, retirees, and others—to hear about how our policies affect peoples’ lives and livelihoods”. YOU CAN SEE WHERE THIS IS GOING. “A clear takeaway from these events was the importance of achieving and sustaining a strong job market, particularly for people from low and moderate income communities.” Further along in Powell’s talk last week, as part of the “New Statement on Longer Run Goals and Monetary Policy Strategy” – Powell specifically states: “With regard to the employment side of our mandate, our revised statement emphasizes that maximum employment is a broad-based and inclusive goal….particularly for many in low and moderate income communities”.
What this means is: MONEY, trillions of dollars of it, to be printed up by the Fed to purchase the government securities that will finance the huge debts that will increasingly be a drag on future productivity. The Wealth Gap must be addressed, without question, so the Fed is correct to that point. However, inflation, in and of itself. creates a predictable Wealth Gap. This Wealth Gap has increasingly asserted itself after Richard Nixon eliminated the exchange of US Dollars into gold in August, 1971, and the Fed started managing the money supply more aggressively. This “third mandate”, now clearly described by Chairman Powell, allows the “fox to continue to be in charge of the henhouse”.
CONCLUSION:
Inflation is coming, and it will not be “controlled” at 2.25% or 2.5%. So far it has been limited to “Assets”, rather than groceries and apparel, but that will change, as it always has. The Fed is now embracing an effort to narrow the Wealth Gap, as described above, but their effort will not succeed. The well to do have their stocks, bonds, art, real estate, and perhaps even gold, so can largely maintain their purchasing power. Lower and middle class consumers, on the other hand, never quite figure out why the higher nominal amount in their paycheck doesn’t ever catch up with their needs. Inflation is the cruelest tax, predictably embraced by the politicians (because they don’t get blamed), and the Federal Reserve, which was established to control inflation becomes an accomplice.
It takes a sound currency to support a productive economy that can grow for the benefit of all, and there is no prospect of that any time soon.
Roger Lipton