Inflation Is Back and Risks Are High, But This Is Why the Gold Price Is Not Reacting
Federal Reserve Chair Jerome Powell delivered his first testimony before Congress. Investors all over the world had waited anxiously for his words. Many, given the huge leverage that exists in stocks now, wanted to discover where interest rates are going. Unfortunately, Powell was not clear. He praised the U.S. economy and all but confirmed expectations that he would follow the approach that his predecessor, Janet Yellen, established. Are there any hints in his testimony about what direction the gold price will take?
The key is inflation expectations. Normally, high inflation pushes investors toward precious metals and so-called safe assets. The gold price goes up in such circumstances but not immediately. For almost a decade now, central banks in the United States (the Fed), in Europe, and in Japan—to mention a few—have run highly unusual and “generous” interest rate policies.
The rates were so low—in Europe, they remain near zero—that economists have lamented the lack of inflation as a problem. Indeed, it is a problem. No inflation means no economic growth. Yet, these same economists have turned on the proverbial dime now.
Suddenly, inflation is a problem again. From zero, we’re told it’s steadily rising and approaching 2.1%, based on year-on-year consumer price index statistics. But in January alone, it rose 0.5%. (Source: “Rise in U.S. inflation puts spotlight on Fed’s Powell,” Reuters, February 14, 2018.)
The Banks Want Higher Rates
Banks, of course, can’t wait for the Fed Chair to send off warnings about inflation. They’re itching to increase the cost of borrowing to consumers. Businesses won’t have to worry as much about interest rates because the tax cuts that Congress passed at the end of 2017 benefit them disproportionately compared to individuals.