Janet Yellen, the Federal Reserve chair, testified yesterday before the Joint Economic Committee. What do her remarks mean for the gold market?

Yellen’s testimony was not surprising. She pointed out that “the U.S. economy has made further progress this year toward the Federal Reserve’s dual-mandate objectives of maximum employment and price stability” and that “the FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time”.

The Q&A session was much more interesting. First, Yellen said that she was not going to quit after Trump’s victory, as her full intention was to serve out her term. Although her resignation was unlikely, the determination to stay to the end of the term (in January 2018) may calm some fears, which does not support the gold market (however, it may be a good news in a sense, at least if investors expected that she would be replaced by more hawkish person).

Second, Yellen was cautious about fiscal stimulus proposed by Trump. She reminded that the U.S. economy is close to full employment, while public debt is high, which limits the room for expansionary fiscal policy. It should be a bucket of cold water for the enthusiasts of Trump’s economic policy, but investors seemed to shrug off these comments. The reason may be that she said that the economic outlook does not change after the elections.

Indeed, third and perhaps most importantly, Yellen said that the election outcome did not affect the case for a December rate hike. She reiterated that the economic data since the last Fed’s meeting has been consistent with economic progress which reinforces the case for a rate increase soon. Surely, Trump’s economic policies may affect the Fed’s outlook, but “only as those come into focus”. Actually, Yelen told Congress that an interest hike could be “appropriate relatively soon”.

Therefore, her testimony is hawkish and implies that December hike is almost certain. The market odds of such a move are higher than 90 percent. Hence, the Fed is likely to raise rates, since not doing it would surprise markets. This is probably why the price of gold declined in response to her testimony (as we thought yesterday). Thus, Yellen’s remarks are bad news for the gold market, as they were her first post-election comments and they were also her strongest remarks in favor of a policy tightening this year.