Expect Another Interest Rate Hike
Despite the current banking crisis, the Federal Reserve is on track to raise interest rates again. Officials are debating if one more hike will be enough to pause the fastest rate-raising cycle in 40 years. The forecasted quarter percentage point increase would lift rates to a 16-year high. The intentional uncertainty of the Fed’s policy is translating into real uncertainty in the market.
The weekend collapse of First Republic Bank, the second-largest bank failure on record, isn’t expected to stop the Fed from proceeding with a rate hike. First Republic, the third major bank to fail in the past two months, was seized by regulators on Sunday night and sold to JPMorgan Chase.
The sale of First Republic to JP Morgan shows how banking stress is making Fed policy decisions harder. Some analysts think the Fed may have to rethink their plans if financial stresses continue. Yet, in a way, the bank failures may help the Fed achieve their goals. If banks tighten up lending, they’ll slow growth – the exact goal of the interest rate hikes. The chief economist at Credit Suisse said, “In their heart of hearts, they (the Fed) wouldn’t mind some real economic weakness.” 1
The economy has been showing signs of cooling. Consumer spending is down as is manufacturing. But a strong job market and high housing costs are sustaining inflation. Economists are now referring to inflation as ‘sticky.’
This ‘stickiness’ has a few Fed officials thinking more than one rate increase will be necessary this year. But a majority of opinion is leaning the other way.
A Fed Pivot?
“We are much closer to the end of the tightening journey than the beginning,” Cleveland Fed President Loretta Mester said on April 20.2
The private sector sees the banking crisis as a red flag on rate hikes. “If you’re ignoring that, and you’re still raising rates regardless, then you’re going to find yourself very soon running the risk of overdoing it, substantially overdoing it,” said the chief economist at Pantheon Macroeconomics. “I really think that we’re now into mistake territory.”3
Economists say Powell will likely hint that the Fed is edging closer to a long-awaited pause in its rate increases. Yet he won’t necessarily send a clear sign that this week’s hike will be the Fed’s last. Instead, he will probably stress that further rate hikes could happen if inflation were to stay persistently high, well above the Fed’s 2% target rate.
Whatever their true intention, the Fed doesn’t want to give away too much information. They want to be able to keep their options open. More importantly, the Fed doesn’t want to send any wrong signals. They worry about sparking a rally or causing a crash.
“What investors have done since October is to take anything that’s good news and overreact to it,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. If Fed communications are “too dovish, market participants will take that, run with it and run too far.”4
Or as renowned economist Mohamed A. El-Erian put it, there is “the risk of central banking going from stabilizer to amplifier of volatility.”
Gold prices have surged in reaction to the banking crisis. Investors are seeking safe havens as they witness tremors shake the soundness of the financial system. Gold is predicted to go even higher if the Fed does pause rate hikes. ‘Sticky’ inflation and a Fed pivot on rates is good news for gold prices. If you want to take advantage of these conditions and protect your portfolio from uncertainty and volatility, call us today at 800-462-0071 to learn more about what a Gold IRA can do for you.