The Fed's bazooka

We're back in 2020-land. The Federal Reserve's decision to cut interest rates this week had been long predicted - for more than a year - but few expected America's central bank would cut by more than a quarter point. The last half-point cut was in 2020, deep in the days of Covid. The federal funds rate is now in a range of 4.75%-5%, with market estimates that they will end 2024 at 4.25%-4.5%. Fed officials are confident that inflation has been hammered into the ground, which is an open question. The Fed oversaw money supply expansion of some 40% following the Great Financial Crash and the Covid pandemic - the Fed is claiming victory over a problem it helped create. It's focus is switching to the employment market; jobs growth and vacancies have slowed in recent months.

The half point reduction in interest rates has already had a significant positive impact on the gold price. For one thing the US Dollar will weaken against other currencies; as the benchmark price for gold is the Dollar, gold will get a leg-up on a weaker US currency. On the news of the cut - and its size - the Dollar price jumped by more than $20/oz. Gold in Dollar terms has gained more than 38% in the last 12 months. The Federal Open Market Committee (FOMC) has encouraged investors but also worried some that this rate cut suggests a recession could be on its way.

Debt's getting cheaper

The interest rate cut also means that everything bought on credit, from mortgages to automobiles, becomes relatively cheaper. In turn this means that the lower interest rate has a political dimension - it cheers consumers and investors who use borrowed money, who in turn are voters facing a Presidential election in a few weeks. Little wonder that global stock markets responded positively to the cut; interest payments on Dollar borrowing will be smaller. Perhaps the biggest beneficiary of lower interest payments will be the federal government itself; interest payments on the national debt - which exceeded $1 trillion for the first time recently - are already higher than the US defense budget. So the US government is now borrowing money to pay the interest on the money it has already borrowed.

The Bank of England (BoE) decided against a cut in its interest rate, 5%, after headline inflation in August refused to drop, instead staying steady at 2.2%/year. Its governor, Andrew Bailey, said that interest rates might be reduced "gradually" but "we need to be careful not to cut too fast or by too much."

No such cautionary words from Jerome Powell, chairman of the Fed, even though the 'core' inflation rate in the US - which excludes food and energy price rises - in August was 3.2%/year, 0.3% higher than in July. Both the Fed and the BoE aim to achieve 2%/year inflation, which is of course damaging to the purchasing power of fiat currency.

Where to from here?

Precious metals' analysts everywhere hurriedly upped their predictions for the Dollar gold price in advance of this week's rate cut. As for the short-term future, forecasts of $10,000/oz or thereabouts are ludicrous but those speculating that $3,000/oz is now within reach no longer sound insane. The Fed has shown it is preparing to cut rates even further in the short term, which will inevitably benefit those investing in gold. According to most data, the US economy is currently in great shape. It is the only G-20 economy with a gross domestic product (GDP) higher than before the pandemic; unemployment has not been as low since the 1960s; household wealth is growing; real (i.e. inflation discounted) wages are rising, and faster than costs. US consumer sentiment is now its highest in four months but is still in recovery.

The bottom line is complicated. The Fed clearly wants to cut rates again before November's election, but it got inflation so wrong a few years ago that it's anxious to avoid making the same mistake. The US economy looks good right now - much better than the European Union's - but the risk is that it is headed for a slowdown, perhaps a recession, next year. Gold is an important diversifier in an investment portfolio - but it's even more important as e-money, with Glint. Glint gives you the opportunity to save in gold and spend in gold for all your daily needs. With governments building-in a decline in fiat currency's purchasing power thanks to their aim of creating the conditions for 2%/year inflation, gold has an irresistible appeal.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.