There is an old saying that says “Don’t fight the Fed.” This saying is typically directed at stock market bears that remain bearish equities even as the central bank lowers rates or maintains ultra-low levels of rates that encourage risk taking. The phrase happens to make a great deal of sense, as the Fed is essentially the most powerful financial institution that there is.
The Fed has the power to control the money supply, and to “create” new money out of thin air. If the Fed wants to keep rates low, stocks may have tendency to move higher as investors seek yield.
While perhaps not discussed as often, it may be just as important to avoid fighting the Fed when it is looking to raise rates as well.
The central bank has become the subject of significant debate in recent months and has even drawn the ire of President Trump. The Fed recently raised the key Fed Funds rate again by 25 basis points as it looks to normalize monetary policy. The central bank is also planning to hike rates again before the end of the year, almost certainly by another 25 basis points.
The Fed currently has another three rate hikes penciled in for 2019, and appears determined to stay the course regardless of recent criticism from Trump and others. The central bank has suggested that further rate hikes are warranted, despite relatively low inflation. Although economic circumstances can change, it looks as if the central bank is intent on following through with its current plans.
The last couple of weeks have seen a significant and dramatic increase in market volatility as stocks have seen sharp declines. While there are certainly numerous reasons for equities to trade lower, the notion of rising rates is without question having an impact. If a few quarter point rate hikes can cause this much damage, imagine for a moment what stocks may be with a few more rate hikes in the quarters ahead.
A strong economy and full employment will likely keep the Fed on its toes, wanting to stay ahead of the inflationary curve. Normalization of policy may come at a cost, however, and many -including the President-seem to understand that higher rates could force markets sharply lower.
Stocks have already begun the show significant signs of cracking, and the idea of additional rate hikes will not do the market any favors. The current path of rising rates may beget even more selling in equities and risk assets, and stocks may have already reached a long-term top.
Given the outlook for increasing market volatility, accelerating inflation and a weakening dollar, now may be the ideal time to diversify with hard assets that may not only appreciate in value but may also provide a hedge against a weaker dollar and decline in purchasing power. Now may be the ideal time to build a significant allocation in physical gold.
Adding this key asset class to your portfolio has never been easier, and given the current economic and geopolitical backdrop there may not be a better time to get started.
Just pick up the phone and speak with an Advantage Gold account executive about the potential benefits that gold ownership may provide. Our associates are here to answer any questions you may have, and can even show you how to incorporate this key asset class using your IRA account.
Don’t wait for the effects of higher rates to take a bite out of your stock portfolio or for a weaker dollar to erode your purchasing power. Explore your options for gold ownership today. Call Advantage Gold at 1-800-341-8584 to get started now.Tags: fed funds rate, interest rates, low inflation, normalization, volatility