Yesterday, the minutes of the Federal Reserve’s February meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?
How can we summarize the?
- The FOMC members observed that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace, while inflation had increased in recent quarters but was still below the Committee’s 2 percent longer-run objective. If the labor market continues to strengthen and inflation rises further, we could see an interest rate hike ‘fairly soon’, as:
“Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.”
- The Fed officials also noted that consumer sentiment had moved up to an elevated level in December and January, while the downside risks in Europe had diminished somewhat.
- However, in the U.S., there is “substantial uncertainty about potential changes in fiscal, regulatory, and other government policies”. It suggests that the Fed may postpone hiking interest rates due to uncertainty about the actions of the Trump administration:
“Most participants continued to see heightened uncertainty regarding the size, composition, and timing of possible changes to fiscal and other government policies, and about their net effects on the economy and inflation over the medium term, and they thought some time would likely be required for the outlook to become clearer.”
- There was no discussion of shrinking the Fed’s $4.5 trillion balance sheet, but the FOMC members agreed to talk about it at later meetings:
“Participants also generally agreed that the Committee should begin discussions at upcoming meetings about the economic conditions that could warrant changes in the existing policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities, as well as how those changes would be implemented and communicated.”
Summing up, the February FOMC minutes were mixed. There was support for an interest rate hike ‘fairly soon’, but with no real urgency, due to the uncertainty about the fiscal policy of the new administration. For us, the minutes were slightly hawkish, as the U.S. central bank is to start a discussion about shrinking its balance sheet at the next meeting. It means a significant change after years of an accommodative stance. Moreover, although Trump was declared a wild card, the near-term risks to the economic outlook were considered roughly balanced, and a couple of participants even argued that political uncertainty “should not deter the Committee from taking further steps in the near term to remove monetary policy accommodation.”
However, gold investors considered the minutes less hawkish than expected, since the price of gold increased after the release. Well, the hawkish tone was not surprising, given the recent hawkish comments stemming from the Fed officials, but the yellow metal’s resilience this week was impressive. Despite that response, we believe that the minutes are still consistent with a March hike. Indeed, theindicate there is likely to be one interest rate increase until May.