Yesterday, the Federal Reserve released their most recent monetary policy statement. How can it affect the gold market?

As it was expected, the Fed officials kept interest rates unchanged at between 0.50 and 0.75 percent. The recent holding pat followed the hike in December. Gold moved upward initially, which signals that investors considered the Fed’s statement as more dovish than expected. Let’s analyze now the FOMC message.

As previously, the U.S. central bank noted that the economic activity continued to expand moderately, the labor market remained solid, while inflation increased in recent quarters, but remained below the target. However, there were a few changes. First, the Fed added the information about the improved measures of consumer and business sentiment. Now, the U.S. central bank seems to wait when the reality will catch up with the rising confidence.

Second, there were changes in the voting members of the FOMC: Evans, Harker, Kaplan and Kashkari replaced Bullard, George, Mester and Rosengren. Remember George’s hawkish dissents last year? They are gone – the current committee is thus probably slightly more dovish than in 2016.

Third, the FOMC members erased the part about the transitory effects of past declines in energy and import prices. It is a very important shift, which signals that these effects have finally dissipated, at least according to the Fed. It increases the probability of a rise in inflation in the near future. Indeed, the FOMC members wrote in the statement:“inflation will rise to 2 percent over the medium term”, instead of the standard phrase that inflation “is expected to rise”. In the Fed’s newspeak it signals the higher odds of meeting the inflation target, which strengthens the hawks at the U.S. central bank. Therefore, the FOMC statement should theoretically be negative for the gold market.

However, the yellow metal shrugged it off, which probably means that investors expected more decisive and hawkish signals about the pace of tightening, including suggestions that the Fed could hike interest rates in March. In other words, the Fed’s latest comments were gauged to be neutral, and slightly less hawkish than the statement in December. It may be the case that the U.S. central bank turned the wait-and-see mode on, as it would like to get more clarity about Trump’s policies. Hence, the Fed statement should not affect market expectations significantly, which creates room for rises in the price of gold – at least until we hear some really hawkish comments from the FOMC members. Stay tuned!