As Federal Reserve chairman Jerome Powell vows to keep fighting the high inflation he helped unleash, investors are also weighing the evidence of a weakening jobs market. Gathering signs of a recession could cause the Fed to dial down future rate hikes.
Central bankers will convene on Sept. 20 to announce their next interest rate decision. Anything less than 75 basis points would be considered a dovish pivot.
But for now, Powell continues to talk tough. In comments this week, the Fed chairman vowed to ensure the public doesn’t see high inflation as the norm.
He also seemed intent on ensuring the public didn’t blame him for creating the inflation problem. Powell insisted the only reason why inflation took off was because of the pandemic. He said,
None of this high inflation that we see around the world now, would've happened without the pandemic. The pandemic severely disrupted the economy. It gave rise to risks of much more dire economic consequences than actually transpired, really. And that was thanks, in part, to the policy response.
The longer inflation remains well above target, the greater the risk that the public does begin to see higher inflation as the norm, and that has the capacity to really raise the costs of getting inflation down. So finally, history cautions strongly against prematurely loosening policy.
I can assure you that my colleagues and I are strongly committed to this project, and we will keep at it until the job is done. I can also assure you that we never take into consideration external political considerations.
Powell has refused to publicly urge Congress and the White House to practice better fiscal discipline in the name of being apolitical. But even Fed economists have noted that monetary policy alone will fail to bring about price stability if the government continues to massively increase demand for new currency through reckless borrowing and spending.
Meanwhile, in Europe, central bankers are finally taking steps to bring record-high inflation down and support the plummeting euro. On Thursday, the European Central Bank hiked its benchmark interest rate by three-quarters of a point.
The ECB’s move could deal a significant blow to dollar bulls. This year, U.S. dollar strength on foreign exchange markets has been primarily attributable to Fed rate hikes. Now that other central banks are getting in on the action, their currencies fare relatively better.
A potential top in the U.S. Dollar Index would tend to be bullish for precious metals markets. Geopolitical observers are eyeing potential catalysts for precious metals moves out of China and Russia.
Russian President Vladimir Putin is trying to move international trade away from the U.S. dollar standard and toward greater acceptance of gold as the ultimate money. Of course, given the comprehensive slate of economic sanctions imposed by the U.S, Putin has no choice but to pursue de-dollarization.
Western sanctions on Russia have targeted the country’s gold specifically. Russian gold has been banned from the London Bullion Market Association, which serves as the world’s preeminent metals trading and price-setting platform.
In response, Russia is developing plans to operate its international gold exchange, which reportedly has been dubbed the Moscow World Standard.
In any event, sanctions won’t stop Russian gold from fulfilling international demand for it. In particular, buyers in China and India are more interested in acquiring gold from whatever source than heeding Western restrictions.
The Chinese are bankrolling Russia’s gold industry. Last month, Polyus, Russia’s largest gold producer, began issuing bonds in Chinese yuan. Polyus is the world’s fourth biggest gold mining company based on production volumes.
Demand for gold in China is translating into demand for yuan in Russia. According to recent reports, the Russian finance ministry is considering borrowing in yuan.
Meanwhile, demand for Russian rubles is rising among its trading partners, sending the currency's value soaring this year.
Instead of crippling Russia’s economy and collapsing its currency, U.S.-led sanctions have had the unintended consequences of strengthening Russia-China ties and accelerating de-dollarization among other U.S. adversaries.
Yes, the U.S. dollar has been strong versus most other major foreign currencies this year. It’s still widely viewed as the world’s reserve currency and isn’t going to suddenly disappear from the world stage anytime soon.
But underneath the surface of its apparent strength is gathering weakness and vulnerability. When measured in terms of its purchasing power, the U.S. dollar has been weakening at an alarming pace, with inflation hitting a four-decade high.
And an increasing number of countries worldwide are trying to reduce their dependence on dollars even though they continue to transact in them, for now, out of convenience.
But convenience shouldn’t be confused with soundness. There are no genuinely sound national currencies in circulation today. The only money respected and trusted universally is hard in the form of gold and silver.