The Federal Reserve is due to release the statement from their December meeting. What can we expect and how can it affect the gold market?
- The U.S. central bank will raise the federal funds rate by 25 basis points to a new target range of 0.50 percent to 0.75 percent.
- The Fed will probably highlight the recent strength in U.S. labor market in the statement, as the unemployment rate has fallen well below 5 percent.
- There may be an upgrade to the description of risks from “roughly balanced” to simply “balanced.”
Summary of Economic Projections
- GDP growth and the inflation rate could be revised up slightly, while the unemployment rate revised lower.
- The median projection for the funds rate should not be importantly changed, as the FOMC members do not want to take action before a thorough analysis of Trump’s policies. There may be a slight upward revision, but it may not translate into more hikes. Hence, the Fed should signal two hikes in 2017 and three in 2018.
Yellen’s Press Conference
- Yellen should be generally cautious, as she will likely wait until Trump takes office and starts implementing his policies, before assessing them and adopting an appropriate monetary policy. However, the tone of her comments could be slightly less dovish than in the past, but she will reiterate that the pace of rate hikes will be gradual.
Impact on the Gold Market
- Since everyone expects a Fed hike, the focus will be on the economic projections and the tone of Yellen’s remarks and the monetary policy statement.
- If the dot-plot or Yellen’s comments are more hawkish than expected, the U.S. dollar should get an additionally boost, while the price of gold will decline.
- However, expectations are quite elevated right now. Therefore, there may be a sell-off in the U.S. dollar, as investors seem to put too much hope in the FOMC meeting.
- In other words, given that a Fed hike is fully expected, the lift is already priced in. Therefore, without a significant upward revision of economic projections or an ultra optimistic Yellen, there may be a “sell the rumor, buy the fact” scenario in the gold market, just like one year ago.
- The initial relief rally does not have to, however, transform into a bullish medium-term trend, as there may be a reversal later on. It is true that gold started its rally after the Fed hiked interest rates in December 2015, but it was caused by the softened path of interest rates. As a reminder, the median FOMC members’ projections in September 2015 implied four rate hikes over the course of 2016. Gold shined in the first half of 2016, because these projections were revised lower and the Fed did not manage to deliver any hike up until now. The current situation is different, as the FOMC members’ projections are more aligned with the market expectations. Stay tuned!