Welcome to our Friday mailbag edition!

Every week, we receive some great questions and comments from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.

This week, I’m at the Legacy Investment Summit in Washington, D.C. And what an event it is!

Hundreds of people have made the trip to the first Legacy Investment Summit since 2019. The energy and engagement at the event is electric.

I’ve already met with my fellow Legacy Research Group editors and analysts, including Teeka Tiwari, Jeff Brown, and Dave Forest… as well as lots of guest and keynote speakers.

But by far, the best bit has been meeting readers and subscribers from across the Legacy Research Group.

We’ve had coffee breaks, breakout sessions, lunches, and cocktail parties. So I’ve met and chatted with lots of people from across the country. It’s been really great to meet you all.

And for those watching on the livestream, or who couldn’t make it this year, I really hope you can make it next year.

I’ve been thrilled to hear questions ranging from when to hold onto your positions, even when markets are volatile… to what will happen to the U.S. dollar… to what will happen with the Federal Reserve… to how we can counteract inflation and supply chain problems.

It’s my goal to continue to answer these and other questions with actionable steps to protect and preserve your wealth.

So keep an eye out for these in my daily emails and my subscription products.

Now, let’s get to your feedback and questions…

Recently, I wrote a series of essays about how the Federal Reserve’s stated plans to raise interest rates won’t come to much. (You can catch up here, here, and here.)

Many of you commented or asked questions. I appreciate everyone’s focus on the Fed.

It’s my goal, first and foremost, to analyze where money is flowing from and where it’s flowing to. That helps me provide the best investment ideas for the protection and growth of your wealth.

And as I’ve shown you time and again, the Fed is at the heart of those money flows. That’s why I focus so much on what it says and does.

But it seems my update from Washington, D.C., right before the Fed raised the interest rate by 25 basis points (as I predicted), had an unexpected reaction from one reader…

I don’t often LOL at anything Nomi says (she seems pretty sharp), but when she wrote: “This week, the world watched to see what the Fed would do… Would it raise rates by 50 basis points to put the brakes on runaway inflation?” I practically split a gut. I do hope that was sarcasm on her part.

– K. Y.

Hi K, I asked my editor to move your question to the top of the pile of Fed-related comments – because it made me laugh out loud, too.

Busted! I should have put that phrase in quotes for sarcastic emphasis. I should have done the same for “put the brakes on runaway inflation.”

But whatever the Federal Reserve could have done to temper rising money supply inflation when it emerged last year is irrelevant. That ship has now sailed.

Raising rates by 25, 50, 100, or even 200 basis points isn’t going to change the path of price inflation at this point. The Fed can’t reduce gas or food prices, anyway.

The best it can do is make the cost of money more expensive.

That would deter big trading firms from borrowing money to take speculative positions. This borrowing aggravates the price increases that are caused by real things like wars and supply chain disruptions.

But the Fed didn’t do that when prices started to inflate. And it doesn’t have the power to stop the runaway inflation train now, no matter what it does.

What’s more, the Fed’s policies are fueling inflation in the stock market. That’s a driving factor behind the distortion I talk about between markets and the real economy.

Of course, no one invested in the markets minds this. I always keep that in mind when recommending investment strategies.

And I, for one, will be watching with great interest to see what the Fed does (or doesn’t do) next…

Next, Ted and Mark commented on the relationship between the U.S. government’s often-ignored debt pile and the Fed’s interest rate policy…

It seems to me that raising interest rates is in itself inflationary, at least to individuals with loans and to the federal government with its massive debt.

The government will just have to print more money and create more inflation in order to pay its interest. This whole idea needs to be revisited.

– Ted C.

Nomi, I believe that you are missing one key point about why the Fed won’t raise rates as much as everyone is predicting. That is reason that the federal budget deficit and the national debt are so large. The government cannot afford much higher rates. Your opinion would be appreciated on this aspect.

– Mark J. K.

Hi Ted, thank you for that observation. And thanks for your note, Mark. I appreciate it.

The way the Fed operates should definitely be revisited, or at least exposed for the market-lifting function it provides.

I’ve been trying to do this for years. That’s the Fed and other major global central banks have colluded to keep the cost of money low and the stock markets high. Especially since the financial crisis of 2008, in particular, and even more so since the pandemic.

And yes, raising interest rates is inflationary, to the extent that it raises the cost of borrowing money for individuals.

And of course, it increases the cost to the U.S. government of servicing its nearly $27 trillion debt. This debt continues to smash new records, with no end in sight. So you’ve both hit the nail on the head there.

Now, even if the Fed tightens policy and raises these particular costs, at some point, the economy will slow down. Or there will be another crisis. In response, the government will borrow more.

And guess who will be one of the main buyers of that government debt. That’s right… the Fed.

So the Fed is essentially caught in a Catch-22 of its own making.

If it raises rates too much, its main debtor – the U.S. government – will need to raise more money to repay its debt…

And I must say for the record, I’m not missing this element of rate and debt codependency at all, even if I don’t mention it in each piece. I’ve commented extensively on it in my many TV interviews and in my books.

In fact, I mentioned it in my interview on Fox Business right after the Fed announced its recent 25-basis-point rate hike. (You can catch my full interview here. And the section where I talk about the relationship between the U.S. government debt and the Fed’s interest rate policy starts around 5 mins 30 seconds into the interview.)

What’s more, the Fed doesn’t want to risk upsetting its main master – the U.S. stock market – by raising the cost of money too much.

On the other hand, if the Fed doesn’t raise interest rates, or if it raises them by too little… people will think it doesn’t care about inflation.

Speaking of masters, Bob wants to know how the Fed manages to serve so many at the same time…

You said the Fed has two official duties and one unofficial duty. Your statement said the Fed would prioritize the unofficial duty over and above its two official duties. How do they get away with that?

– Bob M.

Hi Bob, thank you for asking that question. It’s the nearly-$9-trillion-dollar question (that’s about the size of the Fed’s book of assets).

So how does the Fed get away with it? Well, every time it says its priority is to help the U.S. economy, per its official (dual) mandates of price stability and full employment, the media believes it. And the government (per my above answer) benefits.

But I continue to believe that the Fed’s third – unofficial – mandate is to keep the markets happy. Its actions more than prove this.

This third mandate is a driving force behind the distortion I talk about between the financial markets and the real economy.

The reality is that the Fed is under pressure from the big banks to keep the cost of borrowing as low as possible. These banks are, in turn, under pressure from their big corporate clients.

Sure, when inflation is so obviously high, the Fed will dabble with raising rates and talk about letting some of the assets on its book mature. But these are very minimal measures.

So, to answer your question, the Fed gets away with prioritizing its third mandate because it can.

There’s no legislative limit on how much the Fed can buy with fabricated money. Or on how much fabricated money it can “print.” Or on how long it can keep rates low, even when inflation is high.

And with a government reliant on low interest rates and abundant cheap money, as I talked about above, that’s not likely to change any time soon…

Next, Frank suggests how the big banks I mentioned above might react if they believed the Fed was about to raise rates significantly…

Nomi, I love your insight into the markets! In regard to the Fed raising interest rates versus its book of assets… The Fed is a “private entity” owned by the banks it “regulates” – not a government entity.

If it were to raise rates before unloading its 30-year bonds, the assets would lose a ton of value – just as bad an outcome as the Treasury having to pay higher rates on new bonds.

The banksters are not there to lose money for us. So they will dump bonds or convert them to short-term T-bills before interest rates move much higher. Thoughts?

– Frank L.

Hi Frank, thank you so much for your kind words and excellent question. Yes, the Fed is a private entity – with a fancy, central D.C. address.

It was not created to help the economy. As I’ve shown you, it was created at the behest of big, powerful banks. And it continues to act on their behalf.

When the Federal Reserve was created in 1913, it was supposed to ensure that money flowed across the U.S. banking system, rather than getting clogged up in New York City when things were rough.

That’s why we have a reserve system of 12 banks in different regions of the U.S.

As I described it in my recent essay, it is a “quasi-corporation, members-only club.” It’s not a government institution. Congress merely approves – or rejects – the president’s choice of Fed governors.

Now, to get to the meat of your comment… Even if the Fed were to sell long (10-year maturity upwards) bonds from its book of assets with or without any interest rate hikes, they would fall in value.

As a result, the U.S. Treasury would have to pay more to service its long-term debt. So either way, the U.S. Treasury forks out more.

I agree that the yield curve would steepen if the Fed sold its longer-dated bonds.

As explained in an earlier essay on the yield curve spread, the yield curve spread measures the difference between the 10-year Treasury yield and the 2-year Treasury yield.

The yield curve would also steepen if the Fed fails to hike short rates by as much as it has signaled. Remember, the Fed has signposted increases at each of the six remaining Federal Open Market Committee (FOMC) meetings this year.

Both these scenarios, even if they happen in minimal doses, would cause the yield curve to steepen. This means that the gap between the yield on short-dated bonds and long-dated bonds would widen.

In fact, I recommended a way to play that in a recent e-letter. I said the best way to take advantage of this is to buy the spread between 5- and 10-year Treasury yields. And I showed you a simple way to do that.

That’s it for this week. Thanks again to everyone who wrote in.

If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition. I do my best to respond to as many of your questions and comments as I can.

And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].

Mark Your Calendar

Next Wednesday, April 6, is going to be a landmark day for me and for Rogue Economics.

Right now, my team and I are putting the finishing touches on an urgent briefing. It relates to an historic wealth transfer I see coming – worth $150 trillion.

And it could help you multiply your nest-egg 10 times.

I can’t say too much about it right now… I’m rushing out the door to take part in another panel discussion at the Legacy Investment Summit.

But if you want to find out more, you can just follow this link. With just one click, you’ll be added to my VIP list for the briefing.

And be sure to add this date to your calendar: Wednesday, April 6 at 9 a.m. ET.

I’ll tell you all about it then.

In the meantime, happy investing… and have a fantastic weekend!



Nomi Prins
Editor, Inside Wall Street with Nomi Prins

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