Last week Federal Reserve chairman Jerome Powell spoke at the Economic Club in New York. The talk was one of the more anticipated speeches of the year by the Fed chief. Outside of the once-per-six-week normal Fed meetings.

Powell spoke on a number of topics. However, the most significant aspect of the speech was when he discussed interest rate policy. This is, of course, one of the most powerful tools that the Fed has to impact money supply and inflation.

The phrase Powell used was that rates are “approaching the neutral rate”.  This is a notable departure from past Fed language, in which the central bank had seemed to indicate that rates still had further to increase over the coming years. Now, it appears, that the Fed is preparing to pause its rate-hike cycle. Then possibly preparing to begin cutting rates should economic growth slow within the next few years.

History of Fed-Controlled Interest Rates

Let us examine the history of Fed-controlled interest rates. Below is the federal funds rate from 1955 to the present. The dashed pink line shows how the present rate of 2.25% compares with previous cycles.

What should be obvious is that, over the vast majority of the past 60 years, the federal funds rate has spent far more time above the present 2.25% level than below it. The idea that rates are thus “approaching the neutral rate” as stated by Powell is suspect. While rates vary in large swings over the decades, a mean of 5% – 6% is much more accurate.

Secondly, let us observe that, if Powell were to indeed stop hiking rates at this juncture, the 2018 target would be the lowest peak at which the Fed has ever stopped a rising cycle. The previous peak in 2007 achieved 5.25%, with 6.50% achieved in the 1990s, and 10.00% in the late 1980s.

Something is not right here with the US economy. Why does the Fed need to consider stopping in its rate hike cycle at the lowest level in history?

Debt to GDP the Culprit

Perhaps it is the total US debt, which, as a percentage of gross domestic product (GDP) has reached its highest level since the late 1940s.

Going back to the first chart, notice that the early 1950s was also the time that the Fed held interest rates at or below the current 2.25%.

So, one could say that there is a precedent for the level of debt that the US now carries.

However, it is important that we consider the monumental difference between that era and today: in the late 1940s, the US was just a few years removed from World War II, for which it carried a significant portion of the overall economic burden.

Why, it must be asked, have US debt levels again approached the range that existed following the deadliest conflict in the history of the world?

70 years ago, we had established America as the world’s superpower in preventing the Axis powers from dominating the free world.

What do we have to show for this high debt today?

I would argue that, unfortunately, the majority of the debt-to-GDP increase that we have seen since the mid-2000s has been squandered on bank bailouts following the financial crisis of 2008, and the unwinnable perpetual wars that are still raging in Afghanistan, Iraq, and other parts of the Middle East.

This is not America that accumulated historic debt following its four years of engagement in the Second World War. This is an America that is accumulating similar debt loads for decidedly more dubious causes.

Inflation to Result

Throughout history, empires that over-extend themselves through either unwinnable overseas wars or internal spending programs are forced to debase their currencies through inflation. Such happened in the later stages of the Roman Empire in the form of decreased precious metals content in circulating coins as expansion took its toll on the treasury:

Today in the digital realm, that same inflation occurs but through the central bank, by electronically creating more money, which it then uses to buy the short-end of the bond market to thus suppress interest rates.

Takeaway on Fed Interest Rate Policy

We are seeing the writing on the wall for a future inflationary period ahead. The Fed has mentioned that interest rates are approaching an acceptable point, at the lowest level in Fed history. Debt to GDP is the highest it has ever been outside of World War II.

Precious metals, throughout history, provide a form of protection when the currency in question is debased.


Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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