Yesterday, the surprisingly hawkish minutes of the Federal Reserve’s April meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?

The recent minutes showed that the Fed is open to hiking interest rates in June, which is bad news for gold. The best summary of the minutes is the paragraph below:

“(…) Participants generally saw maintaining the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting and continuing to assess developments carefully as consistent with setting policy in a data-dependent manner and as leaving open the possibility of an increase in the federal funds rate at the June FOMC meeting.”

The U.S. central bank noted that although the growth in economic activity appeared to have slowed, labor market conditions improved further. Moreover, the FOMC members pointed out that in the intermeeting period, equity prices rose, while credit spreads declined. Additionally, most participants expected that, with the U.S. dollar no longer appreciating and energy prices bottoming out, inflation would move to the Committee’s 2 percent target in the medium term. Therefore, a few participants judged it appropriate to increase the target range for the federal funds rate at this meeting.

But as we had already known, the Committee had decided to adopt a prudent stance in April and wait. The lack of action resulted from disappointing spending and production data (some FOMC members were afraid that weak data from the first quarter of 2016 could reflect a loss of momentum in the economy). Moreover, a number of participants pointed out that risks associated with the inflation were titled to the downside, while risks stemming from global economic and financial developments diminished, but still warranted close monitoring.

However, the minutes revealed that the FOMC members would support an interest rate hike in June, if only economic data improved. The most relevant part of the minutes is as follows:

“Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”

Therefore, June turned out to be a live meeting. In consequence, the odds of a rate hike in the upcoming meeting spiked after the Fed minutes. After its release, the chances of a rate rise next month jumped from 15 percent to 33.8 percent. Investors moved their forecast of the Fed hike from September to July.

The jump in expectations of interest rate hikes this year pushed the yellow metal down. The price of gold fell 1.5 percent from around $1,274 to $1,255 after the publication of the minutes. The rise in the odds of an interest rate increase in July and the following months is negative for the gold market, however, the shiny metal showed relative resilience yesterday, given the scale of the shift in market expectations. Additionally, as the Fed regained the control over market expectations, its credibility may rise, which could further suppress the gold prices.

On the other hand, investors have to remember that a June hike is not yet determined and it is not sure that the upcoming data will warrant a move (although inflation picked up in April). Indeed, the minutes showed that there were a range of views on whether the conditions could be met by June. Moreover, the British referendum on membership in the European Union will take place on June 23. As the FOMC members noted themselves, “global financial markets could be sensitive to the upcoming British referendum”. Therefore, it is not certain whether the Fed will risk an interest rate hike before such an important event.

The bottom line is that the April FOMC minutes were more hawkish than the market had expected. Consequently, the odds of a rate hike in June surged and the price of gold decreased, but it did not plunge, as it did last year after such an event. However, further declines are not excluded. A lot of depends on the future FOMC members’ comments. The Fed managed to convince markets that June is a live meeting, however, it is still not certain whether the U.S. central bank will really hike interest rates next month (the decision is still data-dependent), especially one week before the British referendum on membership in the European Union.