Last week, Fed Chair Janet Yellen delivered a speech entitled “The Goals of Monetary Policy and How We Pursue Them” at the Commonwealth Club, San Francisco, California. What can we learn from it?
As we wrote on Thursday, Yellen’s speech was slightly hawkish. She noted that the economy is near maximum employment and inflation is moving toward the Fed’s goal:
“The unemployment rate is less than 5 percent, roughly back to where it was before the recession. And, over the past seven years, the economy has added about 15-1/2 million net new jobs. Although inflation has been running below our 2 percent objective for quite some time, we have seen it start inching back toward 2 percent last year as the job market continued to improve and as the effects of a big drop in oil prices faded.”
Given this progress, “it makes sense to gradually reduce the level of monetary policy support”. Although Yellen did not say anything new we hadn’t already heard during the December FOMC meeting, her remarks strengthen the view that the Fed adopted a more hawkish stance at the end of 2016, which is a negative development for the yellow metal.
The February FOMC meeting will be crucial for the gold market. Markets are not expecting any rate hike next month, but the monetary statement could set the tone for the rest of the year. If it supports a few upward moves in a decisive way, gold prices will probably fall. On the contrary, if the Fed turns out to be softer, the price of gold should increase.
The latest Beige Book strengthens the hawkish scenario, as it indicates that “the economy continued to expand at a modest pace across most regions from late November through the end of the year”, while “pricing pressures intensified somewhat since the last report”. Importantly, labor markets “were reported to be tight or tightening” and “most Districts said wage pressures had increased”. The uptick in wage growth should be welcomed by the Fed hawks, but the uncertainty about Trump’s policies still weighs on market. 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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