Chief Investment Strategist, The Freeport Society
Hello, Fellow Navigator.
The Federal Reserve cut its benchmark interest rate by a full 0.5% yesterday rather than the more customary 0.25%.
While Fed Chairman Jerome Powell talks a good game about independence, this is exactly what Wall Street had been demanding. In the days leading up to the decision, the futures market had been pricing in 2-to-1 odds that would deliver a jumbo cut.
He gave them what they wanted and expected.
I’d love to tell you I have inside intel about the inner workings of the Fed. Unfortunately, all I can do is observe and infer.
And this is how it looks from the outside…
Powell knows the economy is wobbly right now. He saw the volatility spike early last month and recognizes the market’s vulnerability. With the election approaching, he doesn’t want to stumble into an accidental bear market.
So, he caved. Rather than dig in his heels and insist on going slow and steady, he went in big. And the Fed statement also indicates that rates would likely drop another 0.5% before the end of the year, likely pointing to 0.25% cuts in November and December.
Great!
What do we do now?
Before I answer that question, I want you to remember two words: transitory inflation.
Remember that?
Powell assured us back in 2021 that we’d see a “one-time sort of bulge in prices,” but it would be transitory. Well, we know how that worked out.
The pandemic-era inflation wasn’t transitory. It became endemic as high prices begat high prices. Sure, inflation is down from its recent highs, but prices are still rising at a rate 50% higher than 2019 levels.
Wall Street has the attention span of a gnat. And yet to keep this mercurial master satisfied, Powell now risks reigniting this inflation.
Let’s look at recent history in the chart below. CPI inflation fell hard for most of 2022 and the first half of 2023. It then bounced and trended higher throughout the summer of 2023. Following that, it sort of moved sideways through March of this year before starting to trend lower again.
And remember, inflation is still clocking in at 2.6%, which is 30% higher than the Fed’s target of 2%.
No reasonable person can claim the war on inflation is over. And with every basis point the Fed cuts, they risk re-creating the conditions that caused it to surge to begin with.
So, this brings us back to the question: What do we do now?
We hedge by making targeted speculations in “anti-dollar” investments.
Gold is an obvious choice here. All else equal, lower interest rates make dollars less attractive to hold and make alternative currencies like gold a sensible substitute.
My paid members at The Freeport Investor are already up nearly 26% in our vehicle for investing in the yellow metal, and I expect more gains to come.
Cryptocurrencies are also likely beneficiaries, as they benefit from the “FOMO” mentality that pervades a low-interest-rate environment. The Freeport Investor readers are up a whopping 44% in Bitcoin (BTC), and I think that’s just the tip of the iceberg.
One thing is for sure. If Powell’s jumbo rate cut fuels a new surge in inflation, I don’t see him doing an about-face and raising rates again. That would be utterly humiliating because it would mean that he blew this.
Low interest rates in a high-inflation environment are a disaster waiting to happen.
So, make sure you get your hedges in place early. To learn how to stay ahead of market shifts and grow your wealth, click here for more on joining The Freeport Investor.
To life, liberty, and the pursuit of wealth,