“The Fed is stoking moral hazard.”
-Ed Yardeni (CNBC)
Despite the tolls the Coronavirus pandemic is taking on the US Economy, stock prices are on the rise. This may be due to the billions, maybe trillions, of dollars that Treasury Secretary Steven Mnuchin and the Federal Reserve are spending to purchase corporate bonds. When the government injects this amount of money into the financial system, stock prices are driven up and interest rates are pushed down. In March, the Fed announced that it would buy corporate bonds, including the “riskiest investment-grade debt”, for the first time in its history (New York Times). Some economists fear that the Fed will create a large financial bubble, where asset prices appear to be based on implausible or inconsistent views about the future, if it continues to flood the market with liquid assets.
A historically reliable way to signal how healthy the economy is, however, is to look at the price of gold. When gold prices are high, that signals the economy is not healthy, as investors buy gold as protection from either an economic crisis or inflation.Gold prices hit a record high this morning ($1,944 per ounce) breaking its previous 2011 record.