Federal Reserve Is Active & It’s Worth Watching
Over the past few weeks, the U.S. Federal Reserve has been very active, taking bold actions not seen since the financial crisis of 2008–2009. But be very careful as the Fed takes extraordinary steps.
Why has the Federal Reserve been so active recently?
The Fed has lowered its benchmark interest rate to zero, launched quantitative easing (money printing) to make sure lending markets remain operational, and has removed several reserve requirements from banks. The Federal Reserve stands ready to do whatever it takes. All this has happened in less than a matter of two weeks!
The coronavirus pandemic has been creating a lot of headwinds for the U.S. economy. Businesses are facing liquidity issues and banks may not be able to provide that liquidity. So the Fed, by taking all these actions, is making sure there is liquidity and we don’t see a credit crunch like what we saw back in 2008–2009.
A credit crunch would lead to a lot of problems. It wouldn’t just be the banks that could be in trouble; even small business could get hurt. Eventually, this would have a snowball effect: job losses, missed mortgage and credit card payments, and so on so forth.
Here’s what you should know.
What the Federal Reserve is doing now is great in the short term. It might bring some relief, sure. The Fed is doing its job. It is making sure there’s a flow of money in the economy. It’s making sure banks will keep lending and won’t reduce the credit limits of businesses that are struggling in the midst of the coronavirus pandemic.
However, in the long term, everything that’s happening now will turn into a major problem. You see, over the past two weeks, in addition to lowering interest rates, the Federal Reserve has injected a lot of money into the financial system. It has been printing money and buying government and mortgage-backed securities from the banks.
Remember this basic principal of economics: when there’s a lot of something, its value diminishes. The same goes for money: the more money there is out there, the less it’s worth.
Buy Gold?
Dear reader, as I sit back and watch all this unfold, I can’t help but ask: “Is the Federal Reserve making a case for buying gold?”
Over the past few days, gold prices have come down from their multi-year highs. Don’t let the fluctuations in the short term change your perspective. The price of gold has tumbled recently because we could be in the midst of a “sell everything” event—an event in which sellers unload anything and everything in order to liquidate.
But don’t forget: gold is a great hedge against currency devaluation.
By lowering interest rates and printing more dollars, the Fed is essentially saying it wants a lower greenback. So ultimately, gold could really become a great asset for those who own U.S. dollar-denominated assets. It could provide some wealth preservation.
I will end with this: gold at $1,550.00 an ounce seems awfully attractive. If short-term pessimism drives the price of gold lower, it becomes even more attractive. The Federal Reserve’s actions now will take gold prices to new highs over the next few years.