The Federal Reserve is arguably one of the most powerful institutions in the world. Its monetary policy affects every country in the world, either directly or indirectly. Like any organization that has been politicized (which the Fed certainly has), it takes on an ideological bent that manifests in its policy. So what happens when the leadership of that organization changes?
We’re not just talking about the impending replacement of Fed Chair, Janet Yellen. We’re talking about replacing her as well as four of the seven board members. This hasn’t happened since Woodrow Wilson’s presidency. President Trump and President Obama see the world a bit differently. While Obama generally praised the Fed, Trump has been more critical.
This means that, in the next several months, we can expect a significant change in the ideological makeup of one of the most powerful institutions on the planet. You might want to read that again. It’s a big deal.
The Fed has been on a rate tightening cycle over the past twelve months. Since the turn of the century, the Fed’s record on managing the economy while raising rates is not very good. And today, there are any number of things that could break if rates continue to rise. For starters, the sovereign debt crisis would come to center stage as budget deficits explode.
President Trump knows this. He is also very pro-business. Therefore, he is likely to appoint Fed Board members and a Fed Chair who will be quick to tap the brakes on the rate tightening cycle and reverse course quickly if necessary.
The result? According to Jim Rickards, “You should expect lower real rates, slower balance sheet normalization, and higher inflation than markets are now pricing. This will not happen all at once, but in stages over the next year. The biggest winner will be gold. The time to enter your gold position, if you don’t already have one, is now.”
We’ll just leave Jim’s thoughts for you to consider.