What happens when rate cuts come too soon?

In September 2021, as the inflation “train” was building rapidly, Jim Rickards was concerned about that momentum and predicted that it was just beginning.

Keep in mind that Federal Reserve Chairman Powell continued to play down inflation as “passive” in 2021, but also ended up being wildly wrong (almost careless).

On the other side, in actually live in the real world with real people. So in 2021, we thought inflation could accelerate to 10% officially, before I retire.

Outcome? The official inflation rate accelerated to a peak of 9% in June 2022 before beginning to slow slightly.

Which brings us to the present, and a critical question to ponder:

When the price scale will increase At last cool below the Fed’s target 2%?

Keep this question in mind as we continue…

Inflation is too high (and so are interest rates)

As early as March of this year, the Fed was preparing to begin lowering the federal funds rate. According to a Barron’s article, they are “held” to a forecast of three rate cuts by the end of this year:

In the bank’s latest Summary of Economic Projections, released Wednesday after a meeting of the Federal Open Market Committee, policymakers indicated they expected the benchmark federal funds rate to fall to an average of 4.6% by the end of this year. This amounts to three cuts quarter point from the current level of 5.25%-5.50%.

Unfortunately, this forecast was erased by a persistent inflation rate that is still above 3% for one of the longest periods in economic history (as of May 2021).

A recent report from CBS News revealed that the Fed’s rate cut forecast has dropped to one, possibly by the end of this year:

The central bank kept the federal funds rate — or what banks charge each other for short-term loans — in a range of 5.25% to 5.5%. It has remained at that level, the highest in 23 years, since July 2023.

The Fed has been cautious about cutting rates because of stubborn inflation, which is showing some signs of easing, but remains above the central bank’s annual target of 2%. Earlier on Wednesday, the government said that consumer prices in May rose 3.3% on an annual basis, showing a relief from April, when the pace stood a higher pace at 3.4%.

“The fact that the Fed reduced the number of rate cuts from three to one will disappoint those who were hoping for a summer rate drop,” Bright MLS Chief Economist Lisa Sturtevant said in an email quote captured in the same article.

But what if there is a rate cut at the end of 2024 STILL very quickly

As you will see, one country has already conducted that experiment…

This is what happens when you surrender before the war is over

Just a few weeks ago, Governor Tiff Macklem celebrated after Canada’s central bank cut its key lending rate by 25 basis points, according to Reuters:

“Let’s enjoy the moment,” Governor Tiff Macklem said at a news conference after announcing the central bank had cut rates to 4.75% from 5%, the first cut in four years.

Economists could barely contain their excitement another rate cut in July, according to the same Reuters report:

Some economists predicted the BC would cut again in July even though financial markets were pricing in a 39% cut to 4.50% next month.

Unfortunately, reality seems to be throwing sand into the gears, because inflation is not going quietly north, according to Wolf Richter:

“Inflation had not said the last word” so the National Bank of Canada’s Economics and Strategy analysts eloquently titled their inflation report today. They were also surprised.

This is the kind of surprise that the BOC – along with the Fed and the ECB – have been warning about. Inflation does that. Once it reaches the kind of size it did in 2022, it doesn’t just go away quietly.

Total CPI month-on-month accelerated to 3.8% annualized, the sharpest increase since December.

Wolf’s key insight above (emphasis added) is similar to the insight Jim Rickards offered a few years ago when inflation was building momentum. That momentum appears to be picking up steam after Canada cut rates just a few weeks ago.

You can see how the core CPI has risen year over year, and the core monthly CPI has grown year over year in the Wolf chart below:

Will the situation work the same way if the Federal Reserve decides to issue a rate cut later this year? In using Canada as a potential case study, it seems Powell needs to be very careful.

Otherwise, capitulating to the “easy-money” crowd could prove disastrous.

Your best bet is to spend a few minutes now on something that will provide long-term benefits regardless of inflation…

Promote inflation-resistant investments

Regardless of what happens in the near future, one thing is certain: The Fed is deadlocked. High interest rates are intolerable for debtors (including the world’s largest debtor, the federal government). Bad for the housing market. And bad for millions of US households using credit cards to pay for groceries.

Low interest rates expand the supply of credit – making debt cheaper while at the same time depreciating the purchasing power of the dollar. We call it “inflation”.

The Fed hopes to thread the needle between suppressing the economy and igniting another speculative inflationary bubble. History tells us they don’t have a good track record for this – the last five rate hike cycles ended in recession. So the Fed’s score is 0/5.

That means it’s a good idea for you to consider educating yourself on the benefits of diversifying inflation-resistant investments. One of those inflation-proof investments (and maybe the best of them) it is physical gold. This is because physical gold consistently outperforms inflation and has done so since 1971. When inflation is high, gold rises even higher:

Of course, you don’t want to forget other precious metals either.

By making the right moves now, you have an opportunity to put yourself in a potentially better financial position for the future by properly diversifying your retirement dollars. When you have thoroughly diversified your savings, you will be prepared for the weather any kind of economic stormin the belief that, does not matter what the Fed does next week or year, your long-term financial security is not at risk.

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Phillip Patrick is Birch Gold Group’s chief spokesperson and educator. He was born in London and received a degree in politics and international relations from the prestigious University of Redding in Berkshire, England. Growing up in London, he saw first-hand the dangers of overreaching government and socialist policies. He spent years as a private wealth manager at Citigroup on Lombard Street (London’s Wall Street).