Inflation persists. And with it, the hopes for an imminent interest rate cut are diminishing. The Federal Reserve's decision to maintain high interest rates is causing the economy to slow down. Fears of stagflation loom large. Stagflation — a mashup of the Inflation and Stagnation. — describes an economy that shows minimal growth, high inflation, and high unemployment. And it could have severe consequences for the nation and individual retirement savers. 1
The Grim Reality of Persistent Inflation
Initially, economists predicted several interest rate cuts this year. And now, halfway through the year, we have seen zero. The Federal Reserve is determined to keep rates elevated for an extended period to combat inflation. Neel Kashkari, the Minneapolis Fed President, nixes the idea that we will see any rate cuts at all this year. He states he can see rates "sitting here for an indefinite period of time."2
Adding to this, according to a study by the Cleveland Federal Reserve Bank, achieving the 2% inflation target could take at least three years. “There are both theoretical and empirical reasons to think that… the last half-mile could well take several years,” Cleveland Fed economist Randal Verbrugge noted in the report. This outlook suggests that inflation won’t drop until 2027 or later. 3
What's driving this? Supply chain issues are a significant extrinsic cause of inflation. These have been largely resolved. But intrinsic factors such as wage and price setting continue to drive inflation upward. The Personal Consumption Expenditures (PCE) price index is a measure of inflation. It has skyrocketed, with grocery prices up over 21% since 2021, shelter costs up more than 18%, and energy costs up 38%. 3
Indefinitely High Rates & Consequences
Interest rates have been maintained at their highest levels since 2001, between 5.25% and 5.5%, since last July. The Federal Reserve is beginning to question the impact of these hikes on the real economy. 2
“Where is the imprint of this tight monetary policy on the real economy? That’s what is harder to see,” Kashkari remarked. Despite the high rates, core personal inflation is expected to remain significantly above the Fed’s 2% target. This prompts Kashkari to speculate that current rates could persist indefinitely.2
The consequences of prolonged high interest rates are far-reaching. Debt is becoming more expensive as delinquency rates increase. High rates are also slowing economic growth. The Federal Reserve anticipates substantial losses in the commercial real estate sector. This is due to the prohibitive costs of refinancing devalued office properties.
Alarm Bells From Wall Street
“How can you tell me it won’t lead to stagflation?” Jamie Dimon, CEO of JPMorgan, has repeatedly expressed concerns about the potential for stagflation. He attributes this risk to the government's recent policies. Including, as Dimon states, “extraordinary government spending” followed by record-high interest rates. He’s braced himself for high unemployment and inflation alongside low demand. This combination could severely impact stocks, real estate, and banks. 4
Dimon also highlighted the out-of-control US debt as a contributing factor. “I look at the amount of fiscal and monetary stimulus that has taken place over the last five years — it has been so extraordinary” he exclaims. “If things get worse it’s going to filter right through [banks, leveraged companies, and real estate] and in my view, the world’s just not ready for that.”4
Signs of Economic Slowdown
The telltale signals of an economic slowdown are becoming increasingly obvious. Consumption is down. Personal spending is sinking. Disposable incomes have fallen. Economists note that savings cushions have been nearly exhausted. On top of it all, GDP growth forecasts have been revised down from an initial estimate of 2.7% to just 1.2%. 5
What Fed Board Members Say About It
Several Federal Reserve Board members have expressed their views on the outlook for interest rates.
Mary Daly is President of the San Francisco Federal Reserve. She emphasizes the need for further work to bring down inflation. And she warns of the growing risk of rising unemployment. She opposes precautionary cuts to avoid a recession saying, “Not taking preemptive action when it’s not necessary is so important.” 6
Michelle Bowman, a Federal Reserve Governor, takes it even further. She says that if inflation does not decrease, she is open to raising rates. She warns that reducing rates too soon could reignite high inflation. This could necessitate rate increases. She predicts zero rate cuts this year. 7
Austan Goolsbee is President of the Federal Reserve Bank of Chicago. He indicated that he would consider rate cuts if he sees consistent improvement in inflation data.
Potential Stagflation and Its Impact
High interest rates. Slowing economic growth. Persistent inflation. That is the recipe for stagflation. Jamie Dimon has warned of stagflation's effects. It could lead to a significant decline in corporate profits, affecting the market. 4
This scenario could be particularly damaging for retirement funds. as higher interest rates tend to depress bond values and stock prices. Additionally, a slower economy can drag down investments across the board. This can shrink savings more quickly.
Real estate values can also suffer in a high-interest-rate environment. It is critical for individuals to understand these potential impacts. Then plan accordingly for their financial future.8
The Role of Gold in a High-Interest-Rate Environment
Gold can act as a safeguard against the adverse effects of extended periods of high interest rates. During times of economic uncertainty, gold typically maintains or appreciates in value. This helps to counterbalance losses in bonds and stocks. A Gold IRA can provide long-term protection for your portfolio against losses caused by high interest rates. For investors looking to protect retirement funds, considering the advantages of a Gold IRA is a wise decision.
Conclusion
The initial optimism for multiple interest rate cuts this year has faded as inflation remains stubbornly high. With the Federal Reserve signaling that relief from high interest rates may not come soon, the threat of stagflation looms large. This economic scenario could have devastating consequences for individual retirement funds and the broader economy. As such, individuals must stay informed about these developments. They should and consider strategies, such as investing in gold, to protect their financial futures. To learn more about safeguarding your portfolio with a Gold IRA, contact American Hartford Gold at 800-462-0071.
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Max Baecker is the President of American Hartford Gold (AHG), the nation’s largest retailer of precious metals. He leads American Hartford Gold’s mission to help clients achieve long-term financial security with physical gold and silver.
Under his guidance, American Hartford Gold has delivered billions of dollars’ worth of precious metals to thousands of satisfied clients. He has significantly expanded the AHG workforce and opened a third office in Florida.
Max's dedication to upholding American Hartford Gold's industry-leading standards is reflected in its accolades. American Hartford Gold has made multiple high ranking appearances on the prestigious Inc. 5000 List of America’s Fastest-Growing Private Companies. AHG holds an A+ Rating from the BBB and a 5-Star Rating on Trustpilot with thousands of 5-star American Hartford Gold reviews. American Hartford Gold is the only precious metals company trusted and recommended by Bill O’Reilly and Mike Huckabee.
AHG offers investment-grade gold and silver coins and bars at competitive prices. Clients also benefit from its buy-back commitment with no back-end fees. To learn more, visit American Hartford Gold.
1.
https://www.santander.com/en/stories/what-is-stagflation
2.
https://www.startribune.com/inflation-interest-rates-minneapolis-federal-reserve-neel-kashkari/600369183/
3.
https://www.foxbusiness.com/economy/inflation-take-years-fall-2-target-according-cleveland-fed-model
4.
https://www.benzinga.com/analyst-ratings/analyst-color/24/05/39106372/jamie-dimon-says-worlds-just-not-ready-for-potential-stagflation-if-things-get-wors
5.https://www.wsj.com/economy/central-banking/the-fed-might-soon-have-to-worry-about-more-than-just-inflation-a31c1464
6.
https://www.cnbc.com/2024/06/25/fed-governor-bowman-says-shes-still-open-to-raising-rates-if-inflation-doesnt-improve.html
7
https://www.cnbc.com/2024/06/25/fed-governor-bowman-says-shes-still-open-to-raising-rates-if-inflation-doesnt-improve.html
8.
https://www.cnbc.com/2024/05/23/jpm-jamie-dimon-us-could-see-hard-landing-stagflation-is-worst-outcome.html
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