Forget the White House! And forget Congress. The single most important group of individuals for the stock market is the Federal Open Market Committee (FOMC). However, the vast majority of Americans don’t have a clue as to what the FOMC does…or that it even exists.

As most seasoned investors know, the FOMC conducts monetary policy for the Federal Reserve. The FOMC is made up of 12 voting members. These include the chair (currently Jerome Powell) and six other governors appointed by Congress. It also includes the vice chair and four other regional Federal Reserve Bank presidents.

Every six weeks or so, these 12 people (most of them unknown to the general public) get together to make decisions that directly affect your life.

The FOMC conducts eight officially scheduled meetings a year and then announces its policy decisions at the end of each get-together, explaining its decisions by commenting on economic conditions, particularly inflation and unemployment.

This week, Wall Street is fixated on the FOMC’s latest meeting, held Tuesday through Wednesday. At the conclusion of its deliberations today, the FOMC is expected to announce it will begin “tapering,” i.e. unwinding its $120 billion in monthly bond purchases. I’ll get to those monetary policy changes, and what they mean for you, in a minute.

In the meantime, better-than-projected corporate earnings results for the third quarter have been cheering Wall Street and sending equities ever higher.

On Tuesday, the Dow Jones Industrial Average, the S&P 500, and the NASDAQ all closed at record highs. The indices rose as follows: the Dow +138.79 (+0.39%); the S&P 500 +16.98 (+0.37%); the NASDAQ +53.69 (+0.34%); and the Russell 2000 +3.73 (+0.16%). The Dow closed above 36,000 for the first time.

The CBOE Volatility Index (VIX), the so-called “fear index,” dropped more than 2% Tuesday and currently hovers at about 16, below its February 2020 level when the worst of the pandemic hit. That’s a bullish sign.

In early trading after the opening bell Wednesday, the major U.S. stock indices were mixed as investors awaited news from the FOMC.

The Fed’s dilemma…

The FOMC must walk a fine line. The economy still bears the scars of COVID, but the latest readings show that inflation is heating up.

The Bureau of Labor Statistics reported that the consumer price index (CPI) overall accelerated to 0.4% in September over one month, from 0.3% in August (versus the 0.3% consensus estimate), driving the year-over-year gain to 5.4%. Excluding food and energy, the gain was 0.2% and 4.0%, respectively. The October 2021 CPI data are scheduled to be released on November 10.

Even the Federal Reserve’s own preferred measure of inflation, the personal consumption expenditures (PCE) index, is on the rapid ascendancy.

The Bureau of Economic Analysis reported October 29 that the PCE price index for September increased 4.4% from one year ago, reflecting increases in both goods and services. Energy prices increased 24.9% while food prices increased 4.1%. Excluding food and energy, the PCE price index for September increased 3.6% from one year ago (see the following chart, updated October 29).

The fact that the Fed’s PCE index is showing inflationary pressure is significant, because the index is designed to low-ball price increases. The CPI gives a higher weighting to shelter and transportation costs. By reducing the volatility of its preferred inflation gauge, the Fed gives itself more leeway to maintain a looser policy longer.

As I’ve pointed out in previous columns, the Fed historically has been slow to boost interest rates, which in the past has contributed to the formation of bubbles in the economy.

Historically, a jump in inflation is hardly ever enough to kill a bull market in stocks. That said, you still need to be prudent and buffer your portfolio against inflation’s rise. For inflation hedging strategies that make sense now, watch my instructional video: Inflation Hedges Are Gaining in Popularity.

While some FOMC officials are arguing that the bank should be more aggressive on rates, the U.S. central bank faces the classic dilemma, created by the Fed’s dual mandate of working towards full employment while maintaining price stability. If the Fed addresses rising inflation by raising rates too quickly, the Fed runs the risk of stalling out the still vulnerable recovery.

If you lived through the 1970s, the term stagflation (a stagnant economy combined with inflation) is likely coming to mind about now, though we’re nowhere near those levels yet.

Still, it should come as little surprise that the inflation debate is becoming more heated with forecasters and economists sounding the alarm on rising prices and an uncertain investment environment.

Leg-breaker rates…

To vanquish stagflation, famous Fed chairman Paul Volcker hiked interest rates to astronomical levels. In 1981, the federal funds rate peaked at 20% and the prime rate rose to 21.5%. Those rates resemble the “vig” charged by Tony Soprano. Consider the fact that today, the fed funds rate is 0.25% and the prime rate is 3.25%.

It was called “The Volcker Shock” and we’re unlikely to see that draconian scenario again. However, the Fed has indicated that policy rate increases are on the horizon and could occur in 2023, or sooner depending on economic conditions.

Regardless, low interest rates are likely to persist for some time yet to come, allowing inflationary pressures to continue building in the U.S. economy. In addition to higher prices paid by individuals and companies, we’re also seeing asset inflation.

Make sure your portfolio’s hedges sleeve contains hard assets. About 5%-10% of your hedges sleeve should contain gold, the traditional inflation hedge.

Our investment team has just pinpointed a junior gold mining stock that’s poised for exponential gains. If you act now, this tiny company could hand you 20 times your money. It’s an unbeatable combination: outsized growth plus inflation protection. For details on this under-the-radar gold stock, click here.

John Persinos is the editorial director of Investing Daily. Subscribe to his video channel.