Higher Inflation Numbers Predicted This Week – Fed May Get More Drastic
As analysts wait for the new inflation numbers this week, more signs are pointing to a recession. Right now, the market expects to see annual inflation at 8.4%. That would be a new four decade high.1
Soaring inflation is wreaking havoc on the economy. The Fed said they will do whatever it takes to get it under control. As of now, that means a potential 50-basis-point interest rate hike. In addition, the Fed is going to start reducing their assets by $95 billion a month. The Fed’s ultimate goal is to tighten financial conditions so much that it kills consumer demand. And in turn, reduce the going rate of inflation.2
Former Fed President Bill Dudley said, “One thing is certain: To be effective, [The Fed] will have to inflict more losses on stock and bond investors than it has so far.”3
One area where the Fed is succeeding in tightening financial conditions for consumers is mortgage rates. They jumped across the 5% level yesterday. That surge in interest rates has led to a 40% year-over-year decline in new mortgage applications. It has also put pressure on homebuilder stocks and lumber commodity prices.
While there is debate about whether the Fed is doing too much, too soon or too little, too late, consensus is forming that a recession is inevitable.
Banks Predict Recession
Deutsche Bank was the first big bank to say it now expects the US to fall into recession in 2023. They said it was due to inflation and the Ukraine War. Now, they are being joined by Bank of America.
Bank of America stated that the S&P 500 will plunge 11% by the end of 2022 as ‘inflation shock’ sparks a recession. Nearly all prior recessions have been preceded by inflation surges, including in the late 1960’s, early 1970’s, and in 2008, BofA explained.4
Meanwhile, ING chief international economist James Knightley said, “Recession is a rising risk and we see perhaps a 30% chance of that happening in the next 12-18 months.”
Economic Indicators Point Toward Recession
The Treasury’s yield curve is considered a market-based indicator of economic health. It has been flashing red this week. The curve inverted, meaning short term bonds are outperforming long term ones. This indicates a lack of investor faith in the economic future. Inverted yield curves have preceded almost every recession.
A 100-year old recession indicator also went off. The Dow Jones Transportation Average plunged over 20% from its record high. It technically entered a bear market. Made up of transportation stocks, the index is a measure of the economy’s health. Dow Theory says this is a sign of an upcoming recession. This theory states the Dow Jones Industrial Average follows the Transportation Average. So if the Transportation Average takes a dive, the rest of the Dow won’t be far behind it.5
Gold Predicted To Go Higher
JP Morgan and Deutsche Bank both see commodity prices increasing. Gold prices rise in tandem with other commodities prices. JP Morgan said international demand for an inflation safe haven could rise to 1% of total financial assets globally. This would translate to another 30% to 40% upside for commodities such as gold.6
History also shows a direct correlation between rising oil prices and rising gold prices. Both commodities have been reaching record highs. Analysts don’t see a rapid drop in oil prices anytime soon. Consequently, the price gold is predicted to remain high.7
Indeed, the gold market remains unconvinced the Fed can maintain its aggressive tightening throughout 2022. “The market is now focused on whether the Fed’s accelerated tightening path will eventually force the central bank to choose between continuing to fight inflation aggressively or slowing down because of growth concerns. That is providing long-term optimism for gold investors,” said OANDA senior market analyst Edward Moya.
A recession looms in the near future as the Fed struggles to fight inflation. A Gold IRA from American Hartford Gold can start protecting your retirement now. Contact AHG to learn more.