Federal Reserve monetary policy significantly impacts the economy, incentivizing malinvestments, sparking recessions, and creating inflation.
Most people know the Fed is important but they tend to focus on interest rate policy. As Money Metals' Midweek Memo host Mike Maharrey explains, they're missing a big part of the picture.
The central bank's balance sheet is as important as interest rates -- if not more-so.
In this episode, Mike highlights some interesting things going on with the balance sheet and how it could mean even more inflation coming down the pike.
In this episode, he also talks about the current volatility in the precious metals markets.
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Mike opens this show talking about...hockey?
"You’ve probably picked up on the fact that I’m a huge hockey fan. In fact, I’ve played the game most of my life. One thing that I’ve learned over the years is if you just follow the puck, you miss a lot of the game. ... Now, you’re probably wondering what this has to do with anything but think about this: focusing just on the puck happens in other aspects of life. We get fixated on one thing. Now, it may or may not be the most important thing, but even if it is, and we just watch that one thing, we’re going to miss other important things, and it might cause us to miscalculate the trajectory of the game. For instance – and I’m getting to the point now – if you just fixate on Federal Reserve Interest rate policy, you’re not getting the full picture!"
Mike emphasizes that you also have to watch what the Fed is doing with its balance sheet.
"Quite frankly, most people have pretty much ignored the balance sheet. A while back, one commentator called it 'a side show.' But I think the sideshow is arguably more important than the main event that everybody is fixated on like a hockey puck. By that I mean, interest rates."
Before delving into the balance sheet issue, Mike talks about the significant volatility in the precious metals markets, noting the recent sell-offs and rally.
"So, what happened? Well, I don't think anybody really knows what's happening. That's the problem! Tariffs are the big issue. After months of posturing, the trade war kicked off with tariffs against Canada and Mexico going into effect, and the totally unsurprising retaliatory tariffs."
Mike says he thinks the recent rally reflected investors moving capital into safe haven assets as a way to shelter themselves from the volatility and potential devaluation of equities as the global economy is disrupted.
He also noted increasing recession worries.
"I’ve been saying for months that the economy is on its way to a crash. This is the result of decades of easy money and then yanking out the rug with higher interest rates. The economy isn’t built for even this modestly higher rate environment. There is too much debt. It’s like a forest during a drought. All you need is a spark. This could be it."
Mike points out that the dollar index dropped when the tariffs went into effect Tuesday, which is a bit counterintuitive given that most analysts believe tariffs strengthen the currency, at least in the short-term. However, if tariff policies are prolonged, it can weaken a currency in the long-run.
"Regardless of how it plays out, it explains a lot of the volatility in the markets right now and the big swings, not only in gold and silver, but a lot of things. The VIX volatility index has gone up by nearly 54 percent since Feb. 19."
Mike also touches on the continued movement of gold from London to New York, highlighting just how much gold has shifted and briefly exploring some of the possible reasons.
"Regardless of the whys, this movement of gold is definitely something to keep an eye on moving forward."
Mike then shifts his attention to the issue of the Federal Reserve balance sheet. He gives an overview of just how much the balance sheet has expanded since 2008 and why, emphasizing that the result of this process, known as quantitative easing (QE), is, by definition, inflation.
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He also talks about recent efforts to shrink the balance sheet, noting that the original plan that the Fed has already abandoned wouldn't have removed all the inflation created during the pandemic for nearly 8 years.
"Most people believe the Fed bowed out of the inflation fight and began easing monetary policy in September when it delivered its super-sized rate cut. In fact, the Fed began easing months earlier when it tapered balance sheet reduction, or quantitative tightening (QT), in June 2024. Now it appears that even with hawkish talk about keeping monetary policy tighter for longer and slowing the pace of interest rate cuts, the central bank may be set to ease monetary policy even further despite inflation by further slowing or even ending balance sheet reduction."
Why?
As Mike explains, U.S. government efforts to fund its massive levels of spending have run it up to the debt ceiling.
As Reuters reported, the minutes of the January Federal Reserve meeting “showed central bankers concerned about how the effort to shed bonds might collide with dynamics around the federal debt ceiling.” Based on the minutes, “various" policymakers said they were open to pausing or slowing the reduction of Fed-owned Treasury and mortgage bonds to navigate uncertain money market conditions as Congress sorts out government finances and a statutory cap on the federal debt that came back into force last month.”
The current situation is driving “unsettled” money market conditions. According to Reuters, this “increases the risk the Fed could go too far with liquidity withdrawals, something central bank officials do not want, and which opens the door to a shift in the QT process.”
This has led many analysts to speculate that the Fed may soon slow or even end quantitative tightening.
Mike explains how quantitative easing and tightening impact the Treasury market and thus the federal government's ability to borrow. In effect, the Fed facilitates government spending through QE.
"This further underscores the Catch-22 facing the Federal Reserve. It simultaneously needs to hold rates higher for longer to rein in price inflation and cut rates due to the excessive levels of debt and malinvestments in the economy. Obviously, it can’t loosen and tighten monetary policy at the same time. Now, it faces a similar problem with its balance sheet. It needs to slow down or end QT to help the federal government with its borrowing problem, and it simultaneously needs to keep trimming the balance sheet to pull the inflation that it created since 2008 out of the system. Again, it can’t do both."
Mike notes that Federal Reserve Chairman Jerome Powell claims that the Fed doesn't consider fiscal issues when charting the path of monetary policy. Mike calls this nonsense.
"It clearly does. Even if it wants to maintain the illusion of central bank 'independence' from government policy, it can’t because the two are intertwined."
And what are the ramifications?
"With the possibility of slowing the balance sheet out in the open, this clears the path for the Fed to do just that, despite the fact that inflation isn’t dead. ... That means your money is going to be devalued. Again. And that means you probably want some real money – gold and silver."
This leads to Mike's call to action.
"Get real money today. Talk to a Money Metals' Precious Metals specialist today. Just call 800-800-1865."
Article Mentioned in the Show
How Much Gold Is Moving from London to New York?
Is the London Gold Shortage Just a Tariff Scare...Or Something More?
About the Author
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
