We should add “Fed confusion” to the list of the two certain things in life. Yesterday’s Fed notes left rational people of the world scrambling for anything rational to hang on to. A correct math equation, a pretty painting, or possibly a cute armadillo at play… As the TV character Monk used to say, “here’s the thing”: The Fed’s marching orders are to maintain a 2% inflation rate, that being held by some anonymous character as the Secret To A Successful Universe.
As yet unproven, but who cares about facts. If inflation slips below 2%, theory holds that the economy is slow and needs to be stimulated. Above 2% is too fast and the Fed should hit the brakes. Over the past 7 months the Fed raised interest rates 3 times. With those as background, yesterday the Fed noted that their inflation measure is cruising along at 1.2%. Now I only got A’s in Economics and Advanced Mathematical Modelling, and graduated very near the top of my major in business school, but isn’t 1.2% well below 2%, like 40% less? And wouldn’t raising interests be expected to lower inflation, not raise it?
Fortunately some of the members of the Fed disagree with the “central view”, so we may yet see sanity. Let’s not expect that today, let’s just muddle toward tomorrow and see what happens… Add to this the dollar, trying to recover from a strange slump, investors chasing returns in the equity markets, and North Korea now apparently able to hit Alaska with a missile. All this confusion left the gold market confused over which direction to go, so it just went… nowhere.