Nobody was very happy with the Federal Reserve’s announcement on Wednesday that it would cut its targeted Fed funds interest rate and the interest it pays on “excess reserves” by a quarter-point.
Wall Street wanted more, a half-point, or at least a promise by the Fed that more rate cuts were on their way. It didn’t get that promise either.
So at one point, the DJIA was down 400 points, before settling 333 points lower. President Trump tweeted “As usual, Powell let us down.”
The writer of a Mises Institute article this week said, “With the economy growing at 2.1 percent, unemployment at 3.6 percent, creating 170,000 jobs per month, and estimated underlying core inflation of 2 percent, no objective data justifies cutting rates that are already artificially low.”
Then what is the real reason for a rate cut of whatever size? It’s not like someone has to break out the paddles for an economic coronary event, a rate cut defibrillator for a stricken economy.
Then why cut rates?
The Mises articles suggest it’s because we’re heading into a currency war.
The President’s pressure on the Fed to lower rates has been relentless. But don’t let anybody tell you that Trump is the first to politicize the Fed. One Fed chairman famously said years ago that the Fed has to do what the president wants, or it will lose its independence.
Think about that for a minute!
What is the fallout for gold? What is the collateral damage from another interest rate cut of whatever size? It is a currency destruction.
The President wants a lower dollar, just like the rest of the world wants to lower their Yen, Yuan, and Euros. That’s what governments do in trade wars.
One other thing to note is that with its rate cut, the Fed also announced the early ending of its Quantitative Tightening activity. So monetary easing is the policy of the day. But this time it doubled down. Lower rates and a halt to cleaning up its bloated balance sheet. Constant easing drives bubbles and keeps zombie companies alive just a while longer. Both spell trouble down the road.
Loose money persists. Artificially contrived lower interest rates mean higher gold prices. And the world’s central banks know it. They are buying gold when the dollar trades up and when it trades down. They continue to buy gold when the Fed cuts rates, just as they did when the Fed was set on raising rates.
Here’s the latest from Bloomberg:
“Central banks continued to load up on gold in the first half, helping push total bullion demand to a three-year high, according to the World Gold Council.
“Nations added 374.1 tons in the first six months as Russia and China kept building reserves and Poland made a massive purchase. The trend is expected to continue, with a recent survey of central banks showing 54 percent of respondents expect global holdings to climb in the next 12 months.”
Nothing makes as much sense as buying gold when the money printers of the world are trying to lower the value of their currencies with interest rate cuts. And it makes more sense than ever when they become aggressive and competitive with their rate cuts, seeking to outdo one another in devaluing their currency. That’s what they do in trade wars.