The Fed: "Between a Rock and a Hard Place"

[Teach]

Next week, the Federal Reserve will meet to determine what they’ll do with interest rates. Frankly, I believe that Chairman Powell and the Fed Governors are “between a rock and a hard place.” If this were a wartime scenario and not a financial one, you might say that the Federal Reserve has “run out of ammunition.” Frankly, I find that concerning.

You can add to that scenario the significance of tomorrow (Tuesday) morning’s CPI numbers. If they come in “hot,” what can the Fed do? It wasn’t long ago, before SVB, that some were saying a 50 basis-point hike was imminent. At the very least, 25 basis points. But now…given the current banking situation, what does the Fed dare do. They can only hope for an easing of inflation. That would give them a rationale to “stand pat.” But if they do, what’s the risk?

As I continue, years ago, I remember studying hyperinflation in Germany during the early-1920s. Deutschmarks were virtually worthless. The German people were papering their walls with their worthless paper money. I don’t want to appear or sound like an alarmist, but if you believe similar circumstances can’t possibly occur here in the U.S., I believe you’ are sadly mistaken. Keep in mind one thing: The government can do whatever it wants to do. They can, if they so please, debase our currency. If you own physical gold, i.e., coins, they can, through government order, take them away from you. They did just that nearly 100 years ago.

As an aside, my wife’s grandmother (she was born in 1898) told us she had several $20 gold coins. Much to her chagrin, she had to turn them over to government. I believe at the time gold was “pegged” at $35 an ounce. In that light, among others, I would say to everyone: Be attentive. Remain flexible. Be ready, if necessary, to make a financial move at a moment’s notice, even if that move means paying a penalty for early withdrawal.

Finally, what I fear most is the psychological aspect to all of this. Although we’re “sophisticated” creatures, Homo Sapiens, we can, if the circumstances call for it, act in a frightened and panicked manner, not unlike horses and cattle, i.e., stampede. If more banks, in the coming days, end up in receivership, then people may start wondering: Can the F.D.I.C. cover all their losses.

In concluding, a lot of this reminds me of the thinking that occurred at the time of the Vietnam War. I can just hear President Lyndon Johnson... If South Vietnam falls, what nation will be next? Laos, Cambodia, Thailand, etc., i.e., “Domino Theory.” I believe that same mentality could take place if say one of the banks in people’s “own backyard” were to fail. It could - I pray not - lead to a "herd mentality." That would be the last thing anyone would want to take place.

Yes, all eyes, unquestionably, will be on the Fed next week. What will they do? More specifically, the question remains: “What can they do?” They appear to be “between a rock and hard place."