Unlike Gold, the Fed Doesn’t Want a Recession. Who Will Win?

Powell said before the Senate that he didn’t want a recession. Who would? However it can occur anyway, boosting gold prices.Last week, Powell testified before Congress. He reiterated many things he said during his recent press conference, but I believe that a few issues deserve our attention.

Second, Powell painted a surprisingly optimistic picture of the American economy, saying that it “is very strong and well positioned to handle tighter monetary policy.” Well, I doubt it. The US economy is highly indebted and steep hikes could be difficult to swallow for excessively leveraged entities. Other writings on the wall include the yield curve inverting, the S&P 500 Index entering the bear market, and credit spreads widening significantly, as the chart below shows.

However, this is exactly what the Philips curve is about, still widely used by the central banks. According to the Phillips curve, there is a tradeoff between inflation and the unemployment rate, and you can only reduce inflation by increasing unemployment. Of course, the Phillips curve is terribly flawed, but this is what the central banks believe in. So, the Fed may not try to invoke a recession, but it certainly attempts to reduce aggregate demand and cool the overheated economy.

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