After This Week's Market Trauma, Real Rates Are About To Move Into Negative Territory
Gold had a long overdue correction over the last couple trading sessions, but the macro backdrop continues to look bright for the yellow metal
According to the bond market, the Federal Reserve now finds itself well behind the curve. The 10-year U.S. Treasury yield is flirting with 3.90%, while the 2-year has dropped all the way down to 3.60%, after briefly falling below 3.50% earlier today.
Simply put, this suggests the Fed needs to seriously consider 50–75 basis points of rate cuts in the next few months—possibly sooner.
Even if this whole tariff issue were to blow over next week, confidence has been shaken and growth expectations have been ratcheted lower. Today’s U.S. employment data is largely meaningless in such a fluid situation. The uncertainty is so pronounced that Fed Chairman Jerome Powell declined to commit to any policy changes, despite acknowledging the significant risks now emerging:
“While uncertainty remains elevated, it is now becoming clear that tariff increases will be significantly larger than expected, and the same is likely to be true of the economic effects, which will include higher inflation and slower growth."
Let’s not forget: the Fed has a dual mandate, which includes the following:
Maximum Employment
The Fed aims to foster economic conditions that achieve a high level of employment—meaning as many people as possible who want to work can find jobs.
Stable Prices
The Fed seeks to keep inflation in check, ensuring that prices rise at a moderate and predictable rate to maintain purchasing power.
While Powell reaffirmed that the hard data still shows a solid economy, it’s difficult to believe that this data will hold up over the coming weeks.
The Fed is behind the curve and reluctant to yield to pressure from Trump 2.0. However, the FOMC has a clear mandate, and the committee will ultimately do its duty to support the U.S. economy when it is at great risk.
With CPI likely to remain sticky—and potentially even rise closer to 4% in the coming quarters—we’re facing a situation in which the Fed is behind the curve and may push interest rates into negative real territory.
Over the last 50 years, there have been several notable periods of negative real interest rates: the 1970s, the early 2000s, and the post-2020 era. In each of these cases, hard assets—particularly gold—performed very well.
The most recent example of the Fed being behind the curve was between 2018 and 2020.
Real rates peaked in November 2018 and bottomed in August 2020 - gold rose from $1195/oz to $2080/oz during this period:
During the 1970s, during a stagflationary economy, gold performed even better (rising ~2,000% during the decade).
Fear is palpable:
Credit has started cracking:
And recession risk is the highest it has been since at least June 2022:
After this week’s deflationary market shock, the Fed could be on the verge of more than 100bps of rate cuts. This will weaken the US dollar, move real rates into negative territory, and serve to send investors fleeing into hard assets.
Even after this week’s long overdue gold price correction, gold stands out as a bastion of strength and security in an increasingly volatile and unstable world.
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