The Fed Plan to Boost Inflation

In an historic speech, Federal Reserve Chairman Jerome Powell on August 27 announced a new central bank strategy to lift inflation, a policy change that is likely to be supportive of gold prices. The Fed has been frustrated in recent years by its inability to raise inflation to the central bank’s two-percent target rate, a level it believes promotes maximum job growth. 

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Powell stated the Fed will now adopt a strategy that tolerates annual price increase of greater than two percent, rather than attempting to reach the target but not go above it. 

“Inflation that is persistently too low can pose serious risks to the economy,” said the Fed Chairman. “Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.”

The new strategy means the Federal Reserve is likely to hold interest rates at historically low levels for an extended period, until there is a substantial pickup in prices, another positive for gold. 

Powell’s Fed is taking a sharp departure from the inflation-busting approach of former Fed Chair Paul Volcker, who led the central bank from 1979-1987, a strategy that pushed the U.S. into a severe recession in 1981-82. Under the policy, the Fed aggressively raised interest rates and tightened the money supply to drive down inflation and then prevent it from accelerating. 

Gold has historically served as a hedge against inflation. Indeed, anticipation of rising inflation is one factor that has fueled gold’s impressive performance thus far this year. And, there may be more fuel coming from the European Central Bank which has begun its own study of inflation that may also result in a policy change similar to Powell’s strategic shift for the U.S. 

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