Yesterday, the FOMC members leaved interest rates unchanged. What does it mean for the gold market?
As we had predicted, the Fed officials kept interest rates unchanged at between 0.25 and 0.50 percent once again. Did they not mention something about their eagerness to raise interest rates all over the year? So much for three/four hikes this year predicted by some world-class experts, including the FOMC members, in December 2015. The official reason for inaction was stubbornly low inflation. You know, this is because low prices of eggs and cheese are hurting the economy. People refrain from eating to wait for lower prices in the future – it’s called a deflationary spiral.
At a press conference, Yellen also pointed out that the scope for some further improvement in the labor market remained. What she forgot to mention is that the Fed has become a hostage to Wall Street. The U.S. central bank failed to telegraph a rate hike and did not want to surprise Mr. Market. Other reasons are as follows: the U.S. presidential election in November (usually, the U.S. central bank tries to avoid, if possible, any major monetary actions as an election approaches), and the belief that we live in a new normal with very low natural rates. Undoubtedly, yesterday’s Bank of Japan monetary policy action may have also played a role in the Fed’s decision not to raise rates.
However, despite the inaction, which was expected, the statement – when analyzed alone – was clearly hawkish. Why? First, the Fed now sees near-term risks as roughly balanced. In the previous statement, the Committee just noted that these risks had diminished. Second, the Fed added an important sentence to its statement, in which it clearly said that the case for a hike had strengthened:
“The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.”
Third, three officials dissented in favor of a quarter-point hike. It was the most divided meeting since December 2014. Recently, only Esther George, the Kansas City Fed President, voted against the final decision. Now, she was joined by Eric Rosengren, the Boston Fed President who had recently surprised the markets with his hawkish comments, and Loretta Mester, the Cleveland Fed President. It seems that the case for mutiny on the Bounty also strengthened.
OK, the statement was hawkish, but the price of gold soared about $10 initially after the release. Why? Well, the reason for such behavior could be the dovish economic projections released with the FOMC statement. In accordance with their glorious tradition, the FOMC officials scaled back the expectations of hikes in 2017 and over the longer run. We will discuss the summary of economic projections and Yellen’s press conference in greater detail in the forthcoming editions of our Gold News Monitor.
The bottom line is that the U.S. central bank chickened out again (someone counts how many times?) And the expected path of future interest rates flattened. These factors are positive for the gold market. However, the jump may be short-lived, as the focus will shift to December now – and the odds of a hike in the last month of 2016 are now higher than 50 percent. Investors should also remember that the statement was hawkish as near-term risks became balanced, the Fed explicitly said that the case for a hike had strengthened, and the voting showed that there is a growing rebellion to raise interest rates.