Slightly Higher Interest Rates Cause Panic in Stocks, Housing

Fed Chairman Claims to "Understand the Hardship High Inflation Is Causing"

Mike Gleason Mike Gleason
Interview with: Mike Gleason
June 17th, 2022 Comments

Also listen and subscribe on:

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

A tumultuous week for financial markets has precious metals investors experiencing at least some relative stability.

Wall Street is getting slaughtered by surging inflation, accelerating Fed rate hikes, and gathering economic storm clouds. These forces collided this week to send the S&P 500 down over 6%.

There were few places for investors to hide. Bonds also got hit while Bitcoin suffered a 20% pummeling.

As for gold prices, they saw a modest gain on Thursday amid the stock market’s meltdown. As of this Friday recording, gold shows a weekly loss of 1.6% to trade at $1,849 per ounce.

Turning to the white metals, silver is up 1.2% this week to bring spot prices to $21.85 an ounce. Platinum is off 3.2% to trade at $955. And finally, palladium checks in at $1,908 per ounce after falling $100 or00205.2% on the week.

Metals markets fared relatively well compared to stocks following the Federal Reserve’s big rate hike. On Wednesday, the Fed raised its benchmark interest rate by a full 75 basis points.

That represents the central bank’s biggest hike in decades. It also indicates policymakers have become increasingly desperate to contain the inflation pressures they helped unleash.

Last Friday’s Consumer Price Index reading came in at 8.6% -- yet another new multi-decade high. Even that alarming number understates the inflation problem. The American Institute for Economic Research estimates that everyday prices are rising at a 12.8% annualized pace, led by surging fuel costs.

Fed chairman Jerome Powell now claims that he is strongly committed to fighting inflation. Here’s NTD news with a breakdown of Powell’s latest move:

News Reporter: With prices surging and Americans struggling to keep up, the Fed is moving faster to try to fight inflation, raising interest rates by three quarters of a percentage point, its biggest hike in nearly three decades.

Jerome Powell: We at the Fed understand the hardship that high inflation is causing. We're strongly committed to bringing inflation back down, and we're moving expeditiously to do so.

News Reporter: The rate hike comes after May's hotter than expected inflation report.

For over a year, the Fed has been behind the inflation curve. Now it is attempting to make up lost ground in dramatic fashion.

But the sort of drama its outsized rate hikes are creating in financial markets suggests that in trying to tame inflation, the Fed will trigger a massive economic downturn.

Rising interest rates on top of rising expenses is a disaster in the making for leveraged consumers and businesses.

Consumers have had to eat into savings in order to try to keep pace with inflation. Now they will find it tough to take on debt amid tightening credit market conditions.

A weaker consumer means a worsening outlook for retail sales. Businesses are now bracing for a recession.

The Atlanta Federal Reserve Bank’s GDPNow tracker shows economic growth coming in flat this spring, down from previous projections of second quarter GDP gains. The GDP outlook could get even worse in the weeks ahead as the impacts of inflation and rate hikes filter their way through the economy.

In the housing market, sharply higher mortgage rates are starting to wreak havoc as monthly payments become increasingly out of reach for potential buyers. Add a potential housing crash to the list of systemic risks now building in the economy and financial markets.

Investors haven’t faced this kind of environment since the stagflation of the late 1970s. The stagflation raging in 2022 is shaping up to be even more difficult to navigate.

It truly is the worst of all worlds. The economy and financial assets are rapidly going south at the same time as costs of living are moving relentlessly higher.

Nothing seems to be working for investors. Even precious metals markets have delivered disappointing results so far in 2022.

But if stagflation is the dominant trend in the economy, then gold and silver markets could soon deliver a dramatic turnaround. They fulfill a need that cannot be met by stocks, bonds, cash, or cryptos.

All other asset classes are vulnerable to inflation risk, credit risk, economic risk, or counterparty risk. And all these risks are rising at the moment.

Only certain types of tangible assets held securely outside of the banking system are insulated from all these risks. The highest quality tangible asset is hard money itself – gold and silver.

There hasn’t yet been a rush from vulnerable paper assets to the highest quality hard assets. Most investors still think of cash as a safe haven from financial market volatility. And in fact, the U.S. dollar has been strong versus foreign currencies, reinforcing the perception that cash is a safe place to hunker down.

But cash is actually the worst place to be over the long run. It is the only asset class that is guaranteed to lose value in real terms as inflation steadily erodes its value.

The only cash that has a proven track record of retaining value over time isn’t issued by any government. It’s the cash that is mined from the earth and minted into hard money in the form of gold and silver coins, rounds, and bars.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

Mike Gleason

About the Author:

Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.