The FOMC statement after a two-day meeting is scheduled to be released today at 2:00 p.m. ET and will be accompanied by the Fed’s latest Summary of Economic Projections and Yellen’s press conference. How may the markets react to the Fed’s decision on monetary policy?

Analysts generally expect that Fed will no longer promise to be “patient”, setting the table for rate hikes sometime this year. On the other hand, some economists point out that weak economic activity and the rising U.S. dollar may influence the Fed’s decision regarding the timing and magnitude of the interest rate hike.

The uncertainty dominated the currency market yesterday and the U.S. dollar traded flat against most rivals. It clearly indicates that market participants are waiting for the Fed’s statement and Yellen’s press conference. Thus, we believe that the Fed’s hike is not fully priced into the U.S. Dollar Index and the greenback may rally again if investors interpret the outcome of the FOMC meeting as hawkish (on the other hand, a dovish statement may prevent a further surge in the U.S. dollar).

With regard to gold, a less patient Fed would probably hit gold, as a stronger U.S. dollar usually undermines the prices of the precious metals. During the greenback’s bull market and with Fed’s high credibility, investors are going to shift their capital from other countries (for example, the Eurozone) to U.S.-denominated assets rather than gold.

Will the Fed remove the promise to be “patient”? We believe that it will, because the U.S. central bank has become very transparent under Bernanke and Yellen. It is a necessary step to hike the interest rates in a way which would not surprise anybody and would not disrupt the market as was the case back in 1994.

It does not mean, however, that the Fed will necessarily hike interest rates very soon or that the magnitude of the hike will be large, but a symbolic move is possible this year. This is because the Fed has become a hostage to the financial markets’ expectations in a sense. So it cannot merely talk about the possibility of raising rates all the time, while doing actually nothing. Therefore, the Fed may be forced to make a tightening gesture, even if the data does not fully justify it.

The bottom line is that the Fed will probably remove the promise of being “patient” in raising short-term interest rates, granting itself the flexibility to hike them as soon as June. Yellen will try to calm the markets, explaining that the decision on the eventual hike is data-dependent and that there are many factors (sluggish wage growth, low inflation, strong greenback, global risks) which may affect the Fed’s decision about the pace and scope of the hike. However, if the statement is interpreted as hawkish, the U.S. dollar will probably rally again, hitting gold prices.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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