US Federal Reserve officials signaled this week plans for a half-point interest rate hike at their December meeting—a decrease from the recent three-quarter point rate hikes.
Nevertheless, the Federal Reserve is marching towards a policy rate not seen since before the 2007 financial crisis, and, according to Reuters, US-based central bankers imply that the federal funds rate will likely remain at an elevated level at least through 2023. Many analysts believe this bodes a recession is likely.
The Fed’s “raise and hold” strategy sees them raising interest rates until the economy is strong. Federal Open Market Committee (FOMC) meets on Dec. 13-14 after a year of battling the worst inflation in the 1980s.
“In the US, I don’t see how we avoid this recession,” said Bloomberg macro strategist Mike McGlone, because every single time we’ve had a major problem, most notably, since the 1987 crash, when the economy is tilted negative, the Fed has been there to save us.” He notes some recent examples, such as 2018- 2019, when the market dropped 20% and the Fed immediately eased. That tendency for the Fed to be there and save the economy every single time is over.
“People are just in the early days of figuring out that in just the last 10 years every single time the S&P500 dropped 20%, the Fed would ease.” That’s over now, says McGlone.
“They’re tightening into a tilt towards recession.” That means unemployment will pick up.
“The Fed chairman said it,” notes McGlone. “Pain is a term he uses—it has to be part of it to reduce inflation…This has been so overdue for a good major reset, where we get back to the old days where in equities good news is good news and bad news is bad news.”
The key question McGlone is asking is, What stops this process? “What we just saw recently with the Fed increasing its intensification of tightening, despite markets going down, is not something I’ve seen in my lifetime,” he said. “We’re going to come out of this from a lower plateau, meaning almost all risk assets have to drop to a lower plateau.” This means a reduction in the ability of people to buy stuff.
The “fed sledgehammer,” as McGlone calls it, erased nearly $12 trillion of U.S. stock market value at one point and has sent mortgage rates to 7%. McGlone believes the Fed response has laid out an “enduring foundation” for gold and bitcoin. “We are in the maximum pain stage,” he said. “I see us heading towards one of the most significant recessions of our lifetimes.”
The bottom line? “We have the Federal Reserve leading interest rate hikes, most central banks on the planet are hiking rates, as financial assets deflate and the world tilts towards a recession,” he told GoldSilverBitcoin.com. That is a 1929 scenario.”
He adds: “They are fighting inflation and forward looking indicators for inflation are going to collapse and stay down for a long time, which is the environment where gold and bitcoin and long bonds will outperform.”