FX.co ★ Fed minutes belatedly reveal concerns about high inflation

The main factor influencing the pricing of several asset classes, including gold, is the fact that inflation remains at a 40-year high. The forced lockdown brought the global economy to its knees in early 2020.

The actions of the central banks and the US Federal Reserve that followed the event had an absolutely predictable effect and outcome.

Even though the Fed had no control over what was happening, its actions and policies exacerbated the problem. They created an environment that allowed for inflation rates not seen in 40 years. The current rate of inflation is so high that 30% of the world's population has never seen the purchasing power of their wages decline to such an extent. Currently, inflation has affected the entire world economy with the consumer price index in the US at 8.3%, and in the euro area at 10%.

The Fed released the minutes of the FOMC meeting, revealing the obvious; inflation is not falling as fast as they expected. The minutes highlight their concern that the current level of high inflation is unsustainable, making their current aggressive monetary policy the best strategy that will contain less risk to the economy.

"A significant amount of economic activity has not yet generated much of a response," the Fed's minutes read. "Inflation has not yet reacted noticeably to monetary tightening."

Where were the minds of these economic geniuses running the Fed when they let interest rates get out of control starting in mid-2020? Inflation has been rising steadily for some time, hitting 8.5% when the Fed initiated the first interest rate hike in March 2022 by 25 basis points.

The image above shows inflation rates from 2020 to August 2022. It clearly shows that when lockdowns first began shutting down economies around the world in March 2020, inflation was at a manageable 2.6%, only slightly above the Fed's 2% target. Inflationary pressures remained low throughout the year, and it wasn't until 2021 that inflation began to worry.

By April 2021, inflation had doubled to the Fed's target of 4.2%, followed by 5% in May and 5.4% in June. The inflation rate continued to rise, reaching 7% in December 2021, but the Fed kept interest rates at 3-3.25%.

Had the Fed acted earlier with a slight additional interest rate hike in 2021, inflation certainly wouldn't be as high as it is now. Now the Fed is reactive and could easily make the same mistake by raising rates too quickly.