A Major Fed Policy Shift
A Major Fed Policy Shift by Craig Hemke for Sprott Money
It may or may not happen at next week’s FOMC, but that hardly matters. What’s important is that a policy shift is coming and the impact upon the precious metals will be significant.
Many times already in 2020, we’ve utilized this space to explain why negative real interest rates are the most extraordinarily important and fundamental rationale for owning physical gold and silver. Most recently, this article from two weeks ago:
As we head toward another Federal Open Market Committee meeting next week, attention will turn again to whether or not the FOMC will soon implement a policy of “Yield Curve Control”. In the days leading up to last month’s FOMC meeting, this notion was all the rage, but while Yield Curve Control was discussed at the meeting, no formal announcement was made.
Which is interesting, as it appears that some measure of “de facto” yield curve control has already been put into place, beginning around April 1 of this year and with an easily-identifiable range between 60 and 75 basis points.
Whether or not this policy is already being covertly applied hardly matters. Instead, it’s clear that The Fed is headed in this direction and the impact across all markets will be significant.
Late last week, a trial balloon was floated by Bloomberg. You may have missed it, but if you’re a gold and silver investor, it’s extremely important that you take time to consider it today. Here’s the link:
What is this “major policy change” that Bloomberg reports The Fed is actively considering? In a move away from their oft-stated “dual mandate”, The Fed is preparing to change their policy to allow for an overshoot of inflation, above and beyond the current goal of 2% per year. Will this policy change be announced next week? Maybe. Will it be announced in September? More likely. Will it be announced before year end? Almost definitely.
And with this policy shift will come the necessity of Yield Curve Control. Why would YCC become indispensable? Because without it, a rising inflation rate would force interest rates higher…and The Fed is on record stating that they plan to hold yields near zero through 2022. The article from Bloomberg concludes as much, as you can see from the closing paragraph:
Articles such as this don’t appear at Bloomberg by magic. Instead, these trial balloons are designed to measure market response in advance. So understand that higher inflation targets AND yield curve control are very likely coming before the end of the year…and perhaps as soon as September or even next week.
And what does this mean for gold and silver investors? It’s an institutionalization of sharply negative real interest rates. If The Fed holds the yield on the 10-year note below 1% while inflation moves toward 3% or 4%, then negative inflation-adjusted returns for this bedrock institutional holding will drive demand for gold as an alternative Tier One asset. Already, traditional mainstream analysis is beginning to understand the ultimate impact on gold prices. See this from Barron’s:
In conclusion you, too, must also recognize the hugely significant implications that this impending “policy shift” will have on the precious metals. The year 2020 has already seen some tremendous gains for gold and silver. However, when The Fed announces the policy changes of higher inflation and yield curve control, the current price rally is likely to accelerate to the upside.