There Federal Reserve ended its highly anticipated May meeting earlier this month with a 50-basis-point boost, the largest and most aggressive interest rate hike in 22 years, in what can only be defined as a “belated response” to the fastest inflation spike in over 41 years.
There’s no arguing that the Fed has put itself in a box by not moving swiftly enough to raise interest rates last year. Since last year, inflation has been at a four-decade high. Now that the FED is viewed to be acting aggressively, stagflation, or worse, a recession, is a big threat to the economy.
We now have three central scenarios ahead of us. All can be described in terms of economic growth, inflation and interest rates.
Scenario 1 – Soft Landing: This scenario will exist if the Federal Reserve and other central banks are successful in bringing inflation under control faster than most expect, and hence do not need to hike rates as far as many now fear, while growth slows but never enters a recession.
Scenario 2: Stagflation: Despite central banks’ best efforts, inflation continues to rise, which means rates will rise as well. As a result of the combination of inflation and rising interest rates, demand is destroyed, and the economy sinks.
Scenario 3: Recession: The Fed’s tightening suffocates the economy while simultaneously bringing inflation under control. As a result, rates do not rise as much as expected, forcing central banks to pivot once more and begin easing.
As a result, all eyes are on the Federal Reserve, which is expected to raise interest rates again. The question is, how big will such hikes be in the future? The market can handle 50 basis points, but anything more than that might put us in jeopardy. So far, the Fed chair has ruled out dramatic raises, promising to stick to a 50-basis-point rate hike. The trouble is that some factors are beyond his control, such as the Ukraine war or China’s economic lockdown. These are volatile variables that no central bank can factor in, but they have a direct impact on the economy.
Gold is an excellent hedge against economic risk, inflation, and recession. In 2022, gold beat all other asset classes. As a result, don’t forget to invest 15-20% of your wealth in gold. And now that prices have retraced to Rs 50000 and $1800, it’s a great time to buy.