Facade of Federal Reserve building in Washington, D.C.

What the Federal Reserve Can and Can’t Do for the Economy, and What It Means for Gold


Written by Philip Diehl

Feb 15, 2024

During a recent interview on CBS’s 60 Minutes, Federal Reserve chairman Jerome Powell was asked if the national debt is a danger to the economy. He answered, “In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government is on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy.”

A Federal Reserve chair warning about deficit spending is not a surprise. They’ve all desired greater fiscal responsibility, but the Fed has little or no influence on the matter. Taxing and spending are beyond its reach. Congress determines taxing and spending policies and therefore budget deficits.

What isn’t beyond the reach of the Federal Reserve is monetary policy, the other side of the coin to the government’s fiscal policy. Both influence market conditions, but in different ways. Similarly, both can impact gold prices—but how they do so is often misunderstood.

The Federal Reserve has had to balance its policies with Congress’s fiscal policy before.

U.S. Capitol building

After the 2007–2009 financial crisis and Great Recession, Congress gave insufficient fiscal support to the economy, which left the Federal Reserve to carry more of the load of supporting the economy for longer. To help stimulate economic recovery, the central bank adjusted its monetary policy by expanding the money supply and cutting interest rates. At the time, Fed chairman Ben Bernanke made it clear that the Federal Reserve would not make printing money and bailing out companies a permanent policy and that the Fed would begin to unwind its balance sheet once the economy was on firm footing.

In the time since, the Fed has gone through periods of both monetary tightening and unwinding. Because unwinding carries more risk than expected and has to be done more carefully than originally thought, the most recent process of reducing the Fed’s balance sheet has taken longer than anticipated. And then the worst pandemic in a century and its fallout, including inflation, complicated things and resulted in the Fed more than doubling its total assets. But once again, the Fed has begun to reduce its balance sheet and has indicated that it may soon begin reducing interest rates.

Total Assets of the Federal Reserve 2008-2024

For our clients, the question becomes what falling interest rates might mean for inflation, the economy, and gold—and whether now is the time to buy physical precious metals.

Gold prices have risen during both good and challenging economic conditions.

Gold bars in front of upward-trending data chart

Here’s a graph of gold’s daily closing spot price over the last five years.

Gold Spot Price February 2019-February 2024

Three important trends are apparent in this graph: 

1) Gold climbed about $600/oz. between early 2019 and May 2021. Note that this was a period of low inflation.

2) Gold price trend was mostly sideways over the next 2.5 years as inflation took off and remained high. This period of price stagnation ended in November 2023 when markets became convinced that the Fed had beaten inflation and would stop raising rates.

3) With the good news that inflation was falling, gold rallied $140/oz. over the next six weeks as optimism that the Fed would soon start cutting interest rates took hold.

So, over the last five years, gold has rallied during low inflation from early 2019 to mid-2021 and again as inflationary pressures eased beginning last November. During these two periods, gold gained a total of about $640/oz., or almost 50%.

So much for the conventional wisdom that gold’s performance requires high inflation.

For the most part, these price moves were driven by two factors: geopolitical events (such as the Hamas attack on Israel) and hopes, fears, and/or speculation about what the Fed would do with interest rates.

In the long term, gold has experienced incredible growth.

Gold is not just a “bad news asset.” Yes, gold performs well in the face of geopolitical fears and is especially strong in hard times, rallying when other assets are taking a beating and helping to offset losses and limit damage to a portfolio. But gold can also perform well on the heels of good news. In fact, for more than 20 years gold has risen in good economic times, just at a slower pace than riskier assets.

Right now, for example, inflation is falling, and interest rates are posed to follow suit. This is good news indeed for the economy as well as for gold owners and those looking to buy gold. Analysts expect a minimum of three interest rate cuts in 2024, with some saying we’ll get as many as six. These can be expected to accelerate the current rally in gold prices.

The surge in gold prices that began last fall has taken a pause as markets wait for the Fed to act, or the moment, but there’s a lot more to this rally to come.


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