Powell braces investors for a series of strong rate hikes

Chairman Powell had up until recent statements, maintained that inflation levels had peaked, were transitory, and would begin to decline. However, the newest information suggests otherwise. Inflation is currently at 8.5%, a 40-year high. More alarming is that recent data suggests it will continue to mushroom to higher levels. Powell for the first time acknowledged that “it is appropriate to be moving a little more quickly.”

“Our goal is to use our tools to get demand and supply back in synch…and do so without a slowdown that amounts to a recession …It is going to be very challenging.”

The truth that moving inflation anywhere near its target level of 2% is an unobtainable challenge. It makes it obvious that the Federal Reserve has lost control in its attempts to stop inflation from rising.

Because the Federal Reserve underestimated inflationary pressures, and incorrectly assumed that inflation was transitory they have created a challenge that cannot be corrected by simply raising rates. Higher interest rates will not lessen the demand for essential day-to-day needs such as food and energy costs.

According to Fannie Mae, Inflation Rate Signals Tighter Monetary Policy and Threatens a ‘Soft Landing’. In their most recent forecast, they stated that changes in the monetary policy of the Federal Reserve will lead to the expectation of a modest recession in the latter half of 2023. “As we see a contraction in economic activity as the most likely path to meet the Federal Reserve’s inflation objective given the current rate of wage growth and inflation.”

According to Fannie Mae, this latest pivot to a much more aggressive monetary policy underscores the fact that the Fed has shifted its guidance in a strongly hawkish direction and is essentially communicating that policy is behind the curve and needs to catch up. The Economist emphatically and correctly stated that the Federal Reserve had made a historic blunder in regards to inflation.

“It is the Fed, however, that had the tools to stop inflation and failed to use them in time. The result is the worst overheating in a big and rich economy in the 30-year era of inflation-targeting central banks.”

That being said, market participants are bracing themselves for a dramatic shift in the pace at which Fed raises rates. This can be seen in rising yields in U.S. Treasuries, coupled with a change in market sentiment for gold as a safe-haven asset. As recently as April 18, gold was trading just above $2000 per ounce. In the short time of four trading days, it has lost almost $50.

As of 7:50 PM, EDT gold futures basis most active June contract are currently fixed at $1952.90. Our technical studies indicate that there is minor support at $1949.20. This is based upon the 21-day moving average. Major support is currently $1935 per ounce based on the 50-day moving average. As long as prices stay above the 50-day moving average market sentiment will continue to be bullish.

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Wishing you as always good trading,