This week, a few FOMC members delivered speeches. What do they imply for the gold market?

On Monday, James Bullard, St. Louis Fed President, said that the low inflation may not be temporary, so the Fed can leave interest rates unchanged:

“The current level of the policy rate is likely to remain appropriate over the near term,” Bullard said in slides prepared ahead of a speech to the America’s Cotton Marketing Cooperatives 2017 Conference in Nashville, Tennessee.”

Bullard’s insights are interesting, but investors have to remember that he does not vote on monetary policy this year at the FOMC. In Wednesday’s interview, Charles Evans, Chicago Fed President, agreed that low inflation may force the Fed to delay the next interest rate hike, but he argued that it would not stop the U.S. central bank from beginning to reduce its balance sheet in September:

“I personally think that it would be quite reasonable to (begin trimming the Fed’s balance sheet) in September on the basis of the data that I’ve seen so far, even with the potentially temporary lower inflation data.” Importantly, in line with our May edition of the Market Overview, Evans pointed out that the unwinding of the Fed’s balance sheet would have limited impact on financial markets because it had been so well telegraphed. Hence, gold investors should not take their positions based on the upcoming Fed balance sheet normalization.

On Thursday, William Dudley, New York Fed President, delivered a speech at the Economic Press Briefing on the Regional Economy in New York. Although his remarks concerned mainly the issue of inequality, Dudley addressed briefly the U.S. monetary policy. He said:

“Our outlook anticipates a continued moderate growth trend, with some further strengthening in the labor market and an increase in inflation over the medium term toward our objective of 2 percent.”

Dudley’s statement is important, because it signals that the Fed expects the rebound in U.S. inflation. As a reminder, he is a permanent voter within the FOMC and a close ally of Janet Yellen. Nevertheless, investors remain more skeptical. The market odds of a December hike are 45.6 percent, much less than one month ago. Actually, traders expect the next interest rate hike not earlier than in March 2018.

The unexpected 0.1 percent decline in U.S. producer prices in July rather supports Bullard’s opinion. However, inflation may rebound at the end of the year, as the cyclical component could revert. We believe that a December hike is all the time on the table – and gold investors should not forget about it, as rising market expectations of the Fed’s normalization policy could weigh down on the yellow metal.