Fed Chairman Jerome Powell announced a major policy shift Thursday to "average inflation targeting". Because inflation has been below Fed's target rate of 2%, they will allow inflation to run "moderately" above 2% "for some time" as the economy recovers from the Covid-19 recession. Fed funds may be near zero for years. The Fed will be less inclined to hike interest rates when the unemployment rate falls, so long as inflation does not move out of control. Initially gold spiked on the idea of flexible 2% inflation interest rates being kept at zero for a longer time. But the market started to come off when it sounded like Powell started looking at COVID as being more and more under control and looking at the pandemic as being in the rear-view mirror.
The Metals wanted more substance out of this. When Powell started talking the gold market was bullish. What the central bank is saying now is that they are not going to pump trillions of dollars anymore, they will instead focus on the real economy. The problem is the Fed is trapped in QE because interest rates can't be raised again without a stock market and economic collapse. The world economies have now become dependent on cheap debt. The "unlimited QE" bazooka is required because of the Fed needing to monetize the deficit to support economic growth. If the goals of full employment and economic growth quickly come to fruition, the Fed will face an "inflationary surge".
A surge of inflation will limit the ability to continue "unlimited QE". However, if they do not "monetize" the deficit interest rates will surge as the Treasury issues more debt and the repo market spikes. The Fed is trapped in a no win situation. Printing just enough money to keep the system suspended in a position of arrested collapse will not last forever.
At some point banks will be unwilling to lend to insolvent creditors. In order to generate new growth, the central banks will ultimately need to bypass the private financial sector entirely, and lend directly to corporations and consumers. The Fed will need to enter the retail banking business by lending to credit card users and purchases auto loans and other consumer loans. Fiat money systems have historically always led to high inflation, ending usually in total currency collapse. There will be a persistent trend toward investment in hard assets and certain forms of real estate. But of particular interest will undoubtedly be the precious metals gold and silver, which are the most essential self-defense assets in any paper money crisis.
