Stop the presses!
Treasury Secretary Janet Yellen went where treasury secretaries are never supposed to go this weekend….She treaded onto the Fed’s turf, calling for higher interest rates.
Of course, she herself is a former Fed Chairperson, so she is at least coming from a position of intellectual authority. Nonetheless, it was a bit strange…and even more strange was her view that we’d be better off with higher rates (I don’t disagree.)
Speaking during a news conference after attending the G7 ministers meeting in London over the weekend, Yellen told the world,
“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.”
She continued, “We’ve been fighting inflation that’s too low and interest rates that are too low for a decade. We want them to go back to a normal interest rate environment and, if this helps a little bit to alleviate things, then that’s not a bad thing, that’s a good thing.”
Are we hearing things?!
Might there be a movement under way to actually RAISE INTEREST RATES?
In making these comments, the former Fed head gave her friend Jerome Powell a little cover. She gently helped telegraph to the markets and the world that rates may not be this low forever — and that’s not as scary as some might think.
As I mentioned, typically, there’s a line a line in the sand when it comes to the executive branch of government and the Federal Reserve. (President Donald Trump was willing to cross it — he made major news when he sat down with me in October 2018 and criticized Jerome Powell for his failure to lower rates.) And, now THIS administration has indicated it’s not afraid to talk about the Fed either.
Janet Yellen is making a good case for higher rates — they’d certainly be more NATURAL than what we’re witnessing right now.
Meanwhile – let’s face it: the Fed can’t continue at low rates indefinitely …which is exactly what it SEEMS like the Fed is doing. And the consequences of those lower rates and bond buying asset purchase program could prove devastating.
You see, there’s a massive danger that comes with all this printing money…and, it’s called INFLATION.
The Fed has been extraordinarily liberal for far too long — and it’s policy runs the risk of creating another market bubble.
Gold prices softened on the news… with gold trading below $1900 on early morning markets on Monday at $1,891.10. But, even with the telegraphing of higher rates in the futures, the U.S. still risks additional inflation. Indeed, when inflation begins, it’s often difficult to reign in.
And right now? All indications point to inflation as proven in recent CPI and PPI data points.
Commodity prices have skyrocketed and are contributing to higher consumer prices. Americans are paying more for meat, gasoline, corn, grain, soybeans — as the prices of raw materials jump higher. Lumber prices, up 300%, are currently at an all-time high.
Meanwhile, the dollar runs the risk of growing weaker which contributes to even greater inflation since it will take that many more dollars to buy any product.
And then, at some point, interest rates will have to go up…
…but, what happens then?
Can the market handle higher rates? Yellen would like to think so… I, personally, would like to think so… however, we’ve seen this movie before. The most recent market selloffs, in 2000 and again in 2008, were all Fed induced.
Given the Fed’s history of being a day late a dollar short, why might we think that would change now?
Unfortunately, it won’t. As a result, investor should prepare to continue seeing an escalation of prices for all consumer products as the economy reopens, along with continued challenges for the U.S. dollar.
What I’m Watching:
- I expect oil to trade in the $75-100 range this summer
- Gold will likely continue its march higher (to $2000 an ounce) amid escalating inflation data and a weakening dollar.
- Prices for just about everything… will continue going up, up, and away!
We’ll have only ourselves and the Fed to blame.