Yesterday, Yellen testified before the U.S. Congress. What do her remarks mean for the gold market?
On Wednesday, Janet Yellen, still the Federal Reserve Chair, testified before the Joint Economic Committee. Given that Powell will replace her as Fed chief, it was Yellen’s last testimony before Congress.
Her prepared remarks were upbeat about the economic outlook. Yellen pointed out the labor market gains and noted that the U.S. economy strengthened further this year, as real GDP increased at a 3 percent pace in both the second and third quarters, despite the disruptions to economic activity caused by the recent hurricanes.
Moreover, Yellen downplayed risks of financial instability:
“Although asset valuations are high by historical standards, overall vulnerabilities in the financial sector appear moderate, as the banking system is well capitalized and broad measures of leverage and credit growth remain contained.”
However, the most important takeaway from her testimony is the less dovish view on inflation. Last week in the New York, Yellen “came across as giving more credence” to the opinion that low inflation might last longer than expected. A similar signal was sent in the last FOMC minutes. But yesterday, she said:
“In my view, the recent lower readings on inflation likely reflect transitory factors. As these transitory factors fade, I anticipate that inflation will stabilize around 2 percent over the medium term. However, it is also possible that this year’s low inflation could reflect something more persistent.”
Hence, Yellen confirmed that even with subdued inflation, the Fed is likely to continue the gradual tightening of monetary policy. Indeed, she said that the lack of inflation doesn’t mean Fed policy should stand still, as it could risk the outbreak of inflation. “We don’t want to cause a boom-bust set of conditions,” Yellen emphasized.
The conclusion is that the December hike is coming. And a few more hikes in the next months. Yellen’s testimony was more hawkish than her previous remarks (and more than the recent FOMC minutes), so it should not be positive for the gold market. Surely, now Powell’s opinions are more important than Yellen’s. The thing is that they share a similar mindset. Indeed, the yellow metal declined yesterday. It seems that it will remain under pressure until the FOMC meeting in December. 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.
Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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