It looks like I underestimated the Federal Reserve’s largess in the New Year when I extended their freakishly low interest rate guarantee by only a year in the chart from this earlier post.
Turns out, in their policy statement today, the central bank added a full year-and-a-half to their low-rate pledge, more bad news for conservative savers who were hoping for a little better return on their money after three years of punishment, but great news for owners of precious metals that soared today on the news.
It’s not hard to understand why gold and silver prices shot upwards.
Low or negative real (inflation adjusted) interest rates are about the single best predictor of rising metal prices and it’s pretty hard to get a positive inflation adjusted interest rate when you start out with an interest rate of zero.
Pimco’s Bill Gross seems to think that this amounts to “financial repression”, a term that we’ll be hearing lots more between now and 2014. Today’s action was seen as, effectively, QE2.5, with the groundwork now laid for QE3, QE4, etc.
It looks like Richmond Fed President Jeffrey Lacker will be 2012’s lone dissenter as he voted against today’s action, preferring not to state a timeframe for how long rates are expected to be kept freakishly low.
The Fed also lowered their expectations for real U.S. economic growth, from a range of 2.5 to 2.9 percent to just 2.2 to 2.7 percent, and said they expect the jobless rate to end the year at between 8.2 to 8.5 percent, a slight improvement from their prior forecast.
Oh yeah. The central bank now has an inflation target too – 2 percent. Just don’t pay any attention to food prices that are rising by multiples of that amount because the Fed knows what it’s doing here. It’s all good (i.e., if you own precious metals).