Cautious central bankers

With crude oil prices now exceeding $100/barrel, it's no surprise that the US and UK central banks have left interest rates standing. HIgher inflation is sure to follow.

One surprise however - Jerome Powell said he's staying on at the US central bank, the Federal Reserve, as a governor, until a Justice Department probe into him and the bank is truly over.

President Trump said in social media that "Jerome 'too late' Powell wants to stay at the Fed because he can't get a job anywhere else - nobody wants him." Anyone remember President Trump's hope of being awarded the Nobel Prize for Peace?

Higher interest rates (should be) coming

US interest rates stay at 3.5%-3.75%/year and those of the UK remain at 3.75%. Last year markets were betting that interest rates in both countries would be lower by now. The decision to leave rates standing was contested at the Fed, with governor Stephen Miran, a Trump nomination, voting in favor of a small cut.

It was Powell's final meeting as chairman of the Fed as his term came to an end. Powell's decision to stay on at the Fed is unusual and is a response to the many attacks on him and the US interest rates by the President. President Trump's choice of Kevin Warsh to replace Powell is now cleared. The President has continually attacked Powell for not reducing interest rates and evidently he hopes that Warsh will act to do so.

But will he?

The threat of inflation

"Inflation is elevated, in part reflecting the recent increase in global energy prices," said the rate-setting Federal Open Market Committee. Central bankers have a poor record when it comes to pushing up interest rates in the face of higher inflation. Higher rates are the sole weapon central banks have to fight inflation. Under its worst forecast the Bank of England (BoE) says inflation may "peak" at 6%/year in early 2027 and not fall to 2.5% (above it's target of 2%/year) for three years.

The cost of living - or affordability - is a hot topic in both the US and the UK. In the UK local elections on 7 May are widely expected to see the nationally governing Labour party hammered. In the US, where housing, food, and electricity costs have risen by more than 30% since 2019, midterm elections will happen on 3 November. President Trump has staked much on his Safeguard American Voter Eligibility Act (the SAVE act), which would reform US voting so that mail-in voting ended and proof of citizenship would be required to vote. Higher costs of living have done much damage to President Trump's popularity; the SAVE act could rule out millions of voters in November, many of them poor and unlikely to favor the President or his party, the Republican.

The threat of inflation is thus both direct - how much is needed to pay for basics - and indirect - without action to stifle inflation the Republicans could lose their small Congressional majorities.

The yield war

With creeping inflation back, bond yields have been rising. In the UK government bond yields have risen above 5% for the first time since 2008. Higher yields push up the costs of borrowing - a big political threat for governments. They also mean gold buying is negatively affected.

The higher inflation the higher yields and gold buying will be hit - until, that is, it becomes clear to investors that inflation has reached a point where the loss of purchasing power in paper has become insupportable. Then gold will become attractive for buyers.

Warsh will become the boss of the US Fed at the most difficult time for years. He will face a President who needs interest rates to come down swiftly, who treasures the power of his political life, and who will be very stern with anyone who opposes him.

Yet at the same time Warsh faces a burst of inflation to combat which (if he is sensible) he will need to keep interest rates higher. For now gold has lost around $1,000/oz from its peak price, yet is almost 40% higher than a year ago. Its purchasing power remains stronger than the debased fiat money most of us live our life by. Until this war is clearly over and the Strait of Hormuz once again opens to all, we are in a limbo.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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