Fed’s surprising rate cut and its implications for Gold and Silver [Video]

In a recent episode of the Money Metals Midweek Memo, hosted by Mike Maharrey, key economic developments, precious metals trends, and the Federal Reserve's latest actions were discussed. 

Maharrey analyzed how the Fed’s policies, particularly the unexpected rate cuts, are influencing markets, driving stock prices, and impacting gold and silver investments.

Fed’s supersized interest rate cut

During the September 2024 meeting, the Federal Reserve made a surprising move, cutting interest rates by 50 basis points, bringing the federal funds rate to a range between 4.75% and 5%. This marked the first rate cut since 2020. While some market participants speculated that a smaller rate cut was likely, few expected such a large reduction.

Maharrey emphasized that this aggressive action signals deeper concerns within the Fed about the state of the U.S. economy. 

"Think about what the Federal Reserve people are saying: they're telling you that the economy is great, but there's still some inflationary pressure out there," Maharrey said.

However, he noted, “Why did they just order a supersized interest rate cut? That’s the kind of thing you usually see in the early stages of a recession.”

Historically, similar rate cuts preceded significant economic downturns, such as the 2001 recession and the 2008 financial crisis. Maharrey warned, "What the Fed just did, if you look at it historically, it's not great news—it's telling us 'uh-oh,' we might be setting ourselves up for another crisis."

Easy money and stock market reactions

Despite the Fed’s cautious language, the stock market responded favorably to the promise of a return to easy money. Since the Fed signaled the potential for rate cuts months ago, the stock market has surged. For instance, the S&P 500 has seen a 20.8% return in 2024, while the NASDAQ is up 21.7%, and the Dow Jones is up 11.6%.

Maharrey explained, "If you look at a graph, movements in the stock market correlate almost perfectly with the trajectory of Federal Reserve monetary policy. When the Fed loosens monetary policy, it drives bull markets in stocks."

Gold outperforming stocks in 2024

Surprisingly, gold has outperformed major U.S. stock indices this year. As of Monday, gold prices were up 27%, outpacing the S&P 500, NASDAQ, and Dow Jones. "Gold is outperforming all of the major U.S. stock indices in 2024. Gold is up around 27% so far this year," Maharrey pointed out.

He noted that easy money policies tend to weaken the U.S. dollar, which benefits gold. "Gold has outperformed the S&P 500 by about 6%, which was a little surprising even to me," he said. If this trend continues, Maharrey added, "Gold is on track for its best return since 2010."

Silver: More upside potential?

While gold has been the star performer, Maharrey reminded listeners not to overlook silver. Silver has gained roughly the same percentage as gold this year, but the gold-silver ratio remains historically high at 83:1, indicating silver is undervalued compared to gold. "Whenever we see these extra-wide gold-silver ratios, they tend to close—and close with a vengeance," he noted.

Given this, Maharrey suggested silver has more upside potential than gold, especially since silver historically outperforms gold in the later stages of a bull market. "There are a lot of reasons to be optimistic about silver," he added.

The Fed’s conflicting message on inflation and the economy

Maharrey expressed confusion over the Fed’s mixed signals. While the central bank speaks optimistically about inflation coming down and the economy expanding at a “solid pace,” the Fed’s aggressive rate cut suggests deeper concerns. 

He cited Seema Shah, Chief Global Strategist at Principal Asset Management, who said, “A 50 basis point rate cut with no sign of economic turmoil is a unique move in history.”

Maharrey further noted that the Fed’s actions seem contradictory: "Powell downplayed the possibility of a recession, but you don't aggressively ease monetary policy in a booming economy. What they're doing doesn't match up with the way they're characterizing this economy."

Despite Powell’s assurances of a "soft landing," Maharrey questioned the logic behind the Fed’s decision. "Their actions speak louder than their words," he stated, pointing to the historical precedents of similar rate cuts leading to recessions.

What’s next for the US economy?

Maharrey remains skeptical of the Fed’s ability to engineer a soft landing, especially given the excessive debt load on the economy. He reminded listeners that the economy is still grappling with the inflationary consequences of previous easy money policies, particularly from the 2008 financial crisis and the pandemic.

He also warned that the Fed’s balance sheet reduction is slowing down, and it's likely only a matter of time before the central bank halts this process entirely. This, Maharrey said, signals that the Fed is preparing to ramp up inflationary policies again.

Gold and Silver as a hedge against inflation

Given the Fed’s inability to tame inflation and its tendency to revert to easy money policies, Maharrey encouraged listeners to consider gold and silver as hedges against the devaluation of the U.S. dollar. He emphasized, "You want to have real money—you want gold, you want silver."

Conclusion

The latest actions by the Fed reflect a deepening concern about the state of the U.S. economy, despite their optimistic messaging. For investors, the return to easy money is a signal to stay bullish on gold and silver. With gold up 27% so far this year and silver poised for potential outperformance, precious metals remain a compelling investment in the face of economic uncertainty.

As Maharrey advised, “Watch what they’re doing and act accordingly.”