Way Behind the Curve

For much of 2021 the Federal Reserve Board had argued that rising inflation was just “transitory.” No more. Consumer inflation soared to its highest pace in nearly four decades during November, jumping to an annual pace of 6.8 percent.  It was the latest leap in inflation, following a rise in the consumer price index during October to an annual 6.2 percent rate, which had been the highest pace in 30 years. 

No wonder Federal Reserve Chairman Jay Powell told Congress on November 30, it’s “probably a good time to retire that word”—transitory. 

The bottom line is that the Federal Reserve’s ultra-loose policy of printing $120 billion a month to inject into the economy through bond purchases has put the central bank behind the curve—way behind the curve—in attempting to achieve one of its key mandates, to maintain stable prices. The Powell Fed had argued it was willing to allow inflation to run a bit above its traditional two percent target in order to promote job growth. But now prices are soaring at more than three times that target rate.

Inflation, over the long run, has been bullish for gold, the ultimate store of value. 

So, why, one might ask, has gold not yet soared with the jump in inflation? It’s highly likely the Federal Reserve will now attempt to reverse gears, by tapering its bond buying—at a pace faster than previously announced—and by raising short term interest rates in 2022. Higher interest rates, generally, are a short-term negative for gold prices.

But, if the Fed tightens monetary policy and fails to regain control of inflation, gold’s bull rally could resume with vigor in 2022.