This Isn't 'Business as Usual'
Dear subscriber,
Let's talk about the Fed...
To many investors, that's a dreadfully boring way to start a discussion.
Even the name "Federal Reserve" is designed to encourage a good yawn. (Most countries at least add some gravitas and ownership to the name of their central bank... like the Bank of England or Bank of Japan, for instance.)
But the Fed does matter to your life – in a big way – whether you're an investor or not.
That's because the future of our economy has two potential paths today...
Either tariffs soften, and the economy rallies... or President Donald Trump stands pat on his tariffs, they wreak havoc on the economy, and the Fed is forced to cut interest rates to soften the blow and try to prevent a recession.
To be honest, your livelihood depends on the whims of a grand system that you have no control over.
Interest rates – as set by the Fed – have huge effects on growth and the availability of credit.
And recessions can alter the path of individual incomes for decades to follow. Young folks who have the bad luck to join the workforce during a recession have lower earnings well into their 40s. They even have lower life expectancy.
When it comes time to buy a home... well, your mortgage rate depends on where the Fed has set interest rates. You might have to find something smaller if you pick the wrong time to buy.
It all feels unfair. But you can't ignore it.
This week on Wall Street – and in Washington, D.C. – things are happening that can and will change the course of your life.
So let me lay out a bit of Federal Reserve 101. Then, we'll look at where we stand today.
The Federal Reserve has what's called its "dual mandate." It's supposed to 1) maintain full employment and 2) keep prices stable.
In other words, it wants a healthy economy where unemployment is low and inflation is under control.
The only real tool the Fed has to do that is interest rates...
If the economy is struggling and people are losing their jobs, the Fed can lower rates, get more money into the system, and stimulate growth.
Of course, injecting money into the system also stimulates inflation. And if inflation rises above the Fed's 2% target, the central bank can raise rates to bring inflation back down.
Clearly, these two mandates are at odds. The Fed's goal is to strike a balance between them. And it has done a pretty good job at that so far this year...
Unemployment is at 4.2%. And the Fed's preferred measure of inflation – the personal consumption expenditures ("PCE") price index – is at 2.3%.
Now, that sounds a bit crazy with so much talk of the U.S. being on the brink of recession.
But most of the signs of recession are in what we call "soft data" – things like consumer and business sentiment surveys. As we've covered in these pages, both are trending down today...
"Hard data" – things like GDP, inflation stats, and sales reports – typically reacts slower. And some of that data has gotten wacky. That's because businesses and individuals have been on a buying spree ahead of tariffs, making what we see in the data less reliable.
For instance, Trump's whole plan with tariffs is to lessen the U.S. trade deficit. But the numbers released this week for March show that the trade deficit is getting larger...
Pharmaceutical companies specifically have been stocking up warehouses with their goods produced overseas. They want inventory on hand to sell before the tariffs hit...
Over the years, the Fed has learned to work off of the actual, hard data and rely less on forecasts.
That's a good move, though a bit tricky today. In general, the Fed would rather wait for proof of a recession and risk being a little late on lowering rates than try to get a jump start based on hunches and guesses.
That brings us to where we stand with Fed interest rates today...
This Wednesday, the Fed wrapped up its latest policy meeting – and it decided to leave rates unchanged.
Now, after every Fed press conference, macroeconomic investors pore over the Fed's language to find clues as to what policymakers are thinking. Little changes in language are the Fed's way of letting markets know what it sees ahead. That way, when it eventually does change rates, it doesn't surprise the market.
Normally, most investors can skip this sort of Fed watching. But these aren't "normal" times.
That's because the Fed's mood will affect how far Trump may push his tariffs. And, if economic weakness does continue, the Fed's eventual reaction may determine how far this market and our economy fall.
So let's look at the changes between the central bank's commentary in March and May...
After every policy meeting, the Fed puts out carefully worded statements that follow a specific format. Again, every little change carries a lot of weight.
When you read between the lines of the Fed's latest meeting minutes, you can see there were two significant changes this month. I've included the language from the March and May meetings below, with the new commentary in bold.
First, the Fed pointed out a bit of a data quirk – one that it's willing to look past...
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March: "Recent indicators suggest that economic activity has continued to expand at a solid pace."
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May: "Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace."
In other words, there now seems to be a technical issue with how economic growth is measured. But, if you look past that... underlying growth still looks good.
Here's the other big change...
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March: "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty around the economic outlook has increased. The Committee is attentive to the risks to both sides of its dual mandate."
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May: "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen."
That combination – the dreaded "stagflation" – is a worst-case scenario for the Fed... and something we warned about back in March.
The trouble for the Fed is that a tariff-driven jump in prices is not the kind of inflation that can be tamped down by raising interest rates.
Following the statement, Fed Chair Jerome Powell fielded questions at the press conference. He explained that surveys of households and businesses show concerns about tariffs... but that there aren't major economic effects in the data yet.
He did, however, send a quiet warning to Trump that big tariffs will cause economic issues...
It is also possible that the inflationary effects could instead be more persistent. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and, ultimately, on keeping longer-term inflation expectations well anchored.
For now, the employment picture is "broadly in balance," and "the underlying inflation picture is good."
Still, it's clear that the Fed doesn't know what's going to happen next any better than anyone else. As Powell said...
Until we know more about how this is going to settle out, and what the economic implications are for employment and for inflation, I couldn't confidently say that I know what the appropriate path will be.
Despite the best data and the best economists, the Fed is still unsure what's ahead. It still doesn't see anything to really worry about in the data. But it does see the risks of both a recession and higher inflation on the horizon.
Perhaps this should calm us... The economy hasn't crumbled yet.
But it still leaves us all waiting for the same thing. In Powell's words, we're waiting "for greater clarity." As I said last week, that's the only thing that will serve this market.
Right now, if you look at futures markets, they still expect at least three interest-rate cuts this year, with the first in July.
But based on Powell's overall calmness, it sounds like the market expects too much.
The Fed, under Powell, has consistently told markets exactly what it intends to do... and then done it. And today, it's still in "wait and see" mode.
The real secret behind Fed policy is that the Fed tends to set rates just by following the yield on two-year government bonds, though with a bit of a lag...
The yield on the U.S. 2-year Treasury is set by the supply and demand of the market. And the market as a whole tends to know more than the Fed.
By that measure, interest rates are a touch high... but not three-rate-cuts-this-year too high.
For now, if the market expects too many rate cuts, that means stocks are overpriced. Most likely, that's a sign of more pain to come. But like anyone else, all we can wait for is clarity.
What Our Experts Are Reading and Sharing...
What we're experiencing today isn't a small shift in trade policy, but perhaps a complete change in the global economic system. Martin Wolf of the Financial Times gives a great, if a bit technical, breakdown of how and why the old economic global order is dead.
According to Bloomberg, Trump is backing down some Biden-era restrictions on exporting AI chips. While we don't have the full details just yet, that's a bullish sign for the tech industry... and it has chip stocks ripping higher.
It doesn't seem to warrant front-page news in the U.S., but tensions between Pakistan and India have turned violent. The good news, as the Associated Press recently explained, is that since both countries have nuclear weapons, they tend to deescalate their fights before they get out of hand. The bad news, of course, is that both companies have nuclear weapons.
New Research in The Stansberry Investor Suite...
Six weeks ago, I told you that $3,000 per ounce was just the beginning for gold's bull market.
Since then, gold has continued to rally... now hovering around $3,300 per ounce.
But we're not done yet. Gold is likely to run even higher from here. So the question now is... what's the best way to invest in gold?
Buying gold outright can work. But it can be expensive. There's also the question of where to store your gold and how to insure it. Plus, you may end up paying a premium over the spot price of gold.
In today's Stansberry Investor Suite research, our colleague Alan Gula shares another, better way to invest in gold... via gold-mining and gold–royalty stocks.
The two companies he highlights today are both current Stansberry's Investment Advisory recommendations. One is even up more than 80% in just a few years. Importantly, both companies own one-of-a-kind gold-mining "trophy assets."
These kinds of companies typically see larger profits when gold demand and prices rise. They're effectively a levered bet on gold production and earnings. For that reason, owning a gold mine (or a gold-mining stock) can be extremely rewarding.
But you have to be careful... Mining is a brutal business that takes lots of money.
Fortunately, as Alan shares, there are ways to invest in gold-mining stocks while also avoiding the costs and risks associated with gold production.
Stansberry Investor Suite subscribers can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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