This article is part one of a three-part series examining the gold market’s dynamics.
Part One: Understanding the Federal Reserve’s Role
A Brief History of the Fed’s Purpose
In December 1913, President Woodrow Wilson established the Federal Reserve (the Fed) with a clear goal: to prevent the kind of banking crises that had shaken America, like the Panic of 1907. Initially, the Fed’s job was to be a safety net, preventing people from withdrawing all their money at once during times of panic. Over time, the Fed’s responsibilities grew to include supporting economic growth, maximizing employment, and keeping inflation in check. The ultimate aim was to soften economic downturns and, ideally, do away with recessions altogether.
The Fed’s Track Record
Despite these lofty goals, the reality has been less than perfect. Since the Fed’s inception, the U.S. has experienced 20 recessions, a Great Depression, a period of high inflation known as the Great Inflation, a Great Recession, and several financial panics. On average, that’s a recession about every five and a half years. Critics argue that this record shows the Fed’s repeated failures. In defense, monetary officials claim that without their actions, these economic downturns would have been even worse—a statement that the public tends to accept.
Market Trends vs. Federal Reserve Actions
Historically, before a recession, we often see short-term market interest rates drop—a trend that has been consistent since the Fed’s establishment. Curiously, the Fed usually follows suit with rate cuts. This pattern raises questions about whether the Fed is truly in control or simply reacting to market forces.
Take the 2020 COVID-19 downturn as an example. Before the Fed made any moves, market rates were already on the decline. It wasn’t until after significant drops in short-term rates that the Fed lowered its own rates. This pattern isn’t unique to 2020; it’s a historical trend that suggests the market often leads the Fed, not the other way around.
The Effectiveness of Fed Policy Changes
So, do changes in Fed policy actually make a difference? It’s hard to say. The Fed doesn’t seem to control the market; it reacts to it. And when it does react, it’s unclear how much of an impact its actions have. The outcomes following policy changes are inconsistent, leading some to speculate that the Fed’s actions might not be effective at all. However, without a clear way to measure the success of policy changes, we can’t say for sure.
Accountability and the Federal Reserve
One of the biggest challenges is the lack of clear accountability for the Fed. Unlike other branches of government, there seems to be little interest in holding the Fed to account for its actions. It operates on the principle of “what might have happened,” which is difficult to prove or disprove. This lack of evidentiary responsibility allows the Fed to maintain its powerful position without clear measures of its success or failure.
PART TWO: YIELD CURVE CHANGES – Reading the Market (November 2024)
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