Yesterday, the minutes of the Federal Reserve’s September 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 recent FOMC minutes? As earlier this year, the FOMC members agreed that “the labor market had continued to strengthen and that economic activity had been rising moderately so far this year”. The U.S. central bankers also noted that the economic impact of recent hurricanes would only be short-lived. But the most important discussion concerned subdued inflation. Many participants still believed that stubbornly low inflation resulted from either cyclical or one-time factors, so they expected higher inflation in the medium term. However, some members discussed the possibility that secular trends were responsible for the lack of price pressures and several of them:
“noted that in preparing their projections for this meeting, they had taken on board the likelihood that convergence to the Committee’s symmetric 2 percent inflation objective might take somewhat longer than they anticipated earlier.”
It, thus, seems that there is a creeping dovish revolution at the Fed, as it is fed up with persistently low inflation. The key paragraph of the minutes – as it suggests the possibility of a more dovish U.S. central bank in the future – is probably the following:
“Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted. A few of these participants thought that no further increases in the federal funds rate were called for in the near term or that the upward trajectory of the federal funds rate might appropriately be quite shallow”.
However, the hawks did not fly away. The minutes show that some participants “were more worried about upside risks to inflation arising from a labor market that had already reached full employment and was projected to tighten further,” especially that financial conditions actually eased since December 2015, when the Fed started to normalize its interest rates.
Summing up, the U.S. central bank published minutes from its September meeting. They were not very surprising (Yellen said the same at the press conference last month), but they added to the dovish side of the Fed. Hence, the market odds of a December hike decreased from almost 88 percent to 83 percent. As a result, the price of gold increased yesterday. And, as we reported yesterday, gold prices were also supported by a relief rally in euro after eased concerns about Catalonia. If the doubts about the next rate hike in December intensify, gold will shine. However, we still believe that the upward move is likely at the end of the year. The economic outlook is positive in the medium term and financial conditions did not tighten, despite the Fed’s normalization. This is why “many participants thought that another increase in the target range later this year was likely to be warranted if the medium-term outlook remained broadly unchanged.” Stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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