In addressing the distressed economy, Jerome Powell made the case for more government stimulus. Here’s why one author argues it will be great for gold.
On Wednesday, Federal Reserve Chair Jerome Powell gave a speech addressing the difficulties that surround both the domestic and global economy. As expected, the speech had little optimism to it and immediately pushed the stock market down. In the meantime, gold continued to test new highs, having most recently climbed above $1,750 during Friday’s trading session.
As FXEmpire’s Arkadiusz Sieron notes, the closest to optimism one could glean from the speech was Powell’s reveal that the Fed would keep interest rates in positive territory. Although the chair dismissed the negative interest rates of the European Central Bank and the Bank of Japan as dubious experiments, the fact remains that Treasuries have posted some of their all-time low showings even before the coronavirus.
From there, Powell went to some lengths to detail just how bad the situation has gotten from a purely economic standpoint. The chair noted that lawmakers were not only struck by the magnitude, but also the speed at which the pandemic had engulfed all layers of the economy, likening the crisis to the worst of its kind since World War 2.
What was already a decline in economic activity was greatly aggravated by the coronavirus, with Powell noting that any job gains made over the past decade have been erased. Furthermore, the chair revealed that the pandemic caused a loss of 20 million American jobs in the span of just two months.
The rest of Powell’s speech struck a familiar chord, as the chair warned people not too get overly anxious with expectations of a recovery and warned that a V-shaped recovery, or a quick turnaround, is unlikely. Instead, Powell and his team expect the coming rebound to not only be slow, but riddled with uncertainties.
Addressing government spending, Powell seemed satisfied with the Fed’s lack of hesitation when it came to issuing their trillion-dollar stimulus check. The chair said that the trillions of dollars printed thus far might not be the Fed’s final response on the matter, and that the central bank is open to more stimulus if the need arises.
Likewise, during the speech, Powell appeared to urge Congress to open the door for more fiscal spending. The federal government has already created a massive deficit, moving the budget from a $160 billion surplus in April 2019 to a deficit of $737.9 billion during the same month this year.
Pointing out that the Fed deals more with lending than it does with spending, Powell seemingly wasn’t content with the $2.9 trillion spent on mitigating the effects of the pandemic, believing more support could be in order. In short, the speech at the Peterson Institute for International Economics was one of a contracting economy, uncertain recovery, currency debasement and piled-up debt, all major tailwinds that have kept gold breaching one high after another over the few past weeks.