On Friday, Fed Chair Janet Yellen delivered a speech entitled “From Adding Accommodation to Scaling It Back” at the Executives’ Club, Chicago, Illinois. What can we learn from it?
Last week, several Fed officials expressed their views on future monetary policy, signaling a consensus to raise interest rates at the nearest meeting. Yellen’s speech put the final nail in the coffin for a March hike. The most important part of her remarks is as follows:
“In short, we currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect. Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
Yellen claimed that the Fed had wanted to tighten its policy more since 2014, but both unexpected economic developments and deeper reevaluations of structural trends affecting the U.S. and global economies had prevented the U.S. central bank from adopting aggressive stance. But now the outlook has changed:
“On the whole, the prospects for further moderate economic growth look encouraging, particularly as risks emanating from abroad appear to have receded somewhat. The Committee currently assesses that the risks to the outlook are roughly balanced.”
Hence, brace yourselves for more interest rate hikes in the upcoming years. Yellen pointed out that the Fed’s employment goal has largely been met, while inflation has been rising toward the target. Therefore, the U.S. central bank is on track to raise interest rates.
“Given how close we are to meeting our statutory goals, and in the absence of new developments that might materially worsen the economic outlook, the process of scaling back accommodation likely will not be as slow as it was in 2015 and 2016.”
This is what we have argued for a long time. In the January edition of the Market Overview, we wrote: “With the labor market near the full employment and rising inflation and inflationary expectations, two or three hikes in 2017 are not impossible, unless we witness recession, of course.” Indeed, at the current level of market odds, a March hike is now locked. Higher interest rates should be negative for the gold market. However, a lot depends on the message associated with the move. Investors should not forget that interest rates are what really matter for gold prices – a small rate hike may not be enough to combat inflation and raise real interest rates. The Fed being behind the curve is a positive factor in the gold market.