Yesterday, the minutes of the Federal Reserve's June meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?
Little was expected from the minutes, as the last FOMC meeting was followed by a press conference and economic projections. However, they turned out to be a dovish surprise. Why? First, there was prophetic concern at the meeting (unexpressed in the official statement) about developments in Greece and China and possible spillover effects on the U.S. Several members
“mentioned their uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging market economies. (…) Many participants expressed concern that a failure of Greece and its official creditors to resolve their differences could result in disruptions in financial markets in the euro area, with possible spillover effects on the United States.”
What is important is that these minutes are from the meeting that took place before the China’s stock market crash and the referendum in Greece. Second, central bankers struck a rather dovish tone in their discussions about monetary policy.
“Most participants judged that the conditions for policy firming had not yet been achieved; a number of them cautioned against a premature decision” and “many participants emphasized that, in order to determine that the criteria for beginning policy normalization had been met, they would need additional information indicating that economic growth was strengthening, that labor market conditions were continuing to improve, and that inflation was moving back toward the Committee’s objective”.
Please note that ‘many’ in this case means “all but one”:
“In considering the Committee's criteria for beginning policy normalization, all members but one indicated that they would need to see more evidence that economic growth was sufficiently strong and labor market conditions had firmed enough to return inflation to the Committee's longer-run objective over the medium term; one member was already reasonably confident of such an outcome.”
Third, the Fed wrongly believed that inflation would eventually increase after "transitory" effects, such as lower oil prices and the higher U.S. dollar, dissipate.
“Participants noted that the apparent stabilization of crude oil prices and the foreign exchange value of the dollar would reduce the downward pressure on inflation from falling prices of energy and imported goods”.
Yeah, exactly. Since the FOMC meeting, crude oil prices have fallen by more than 12 percent, while the greenback has risen against euro more than 1 percent. Call it what you want, but this is definitely not ‘stabilization’. Therefore, there will be again downward pressure on inflation, which could impact the Fed’s decision on interest rate hike.
The key takeaway is that the minutes of the Federal Reserve's June meeting are more dovish than the official statement by the FOMC members, due to concerns about international developments, a premature hike and a wrong prediction about future inflation dynamics. Although the Fed is technically ready to lift-off, it seems that a September hike is off the table given the mixed first-half economic data and the outbreak of another Greek debt-crisis and China’s stock market crash. Thus, the minutes are supportive for the yellow metal. Gold price finally started rising on Wednesday on expectations for a later interest rate hike and a weaker U.S. dollar.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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