Yesterday, the minutes of the Federal Reserve's July meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?
As always, thanks to its ambiguity and divided opinions among the FOMC members, one can read almost anything into the Fed’s minutes. However, at least for us, they again were rather dovish. Why? Well, the Fed’s next policy meeting is in a month, but central bankers still have no idea whether they should raise interest rates, not to mention the timing and pace of a possible hike. Or they simply do not want to signal their exact intentions.
Anyhow, the most important piece is that “most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point”. Although it may be interpreted as a hint that a September move is still on the table, the officials are clearly divided on this issue, as
“some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the Committee for initiating a firming of policy”.
Sure, ‘most’ is more than ‘some’, but the recent developments in China, further appreciation of the U.S. dollar and declines in commodities, soaring yields on riskiest junk bonds, and stubbornly low inflation may strengthen the dovish camp.
Indeed, “several participants noted that a material slowdown in Chinese economic activity could pose risks to the U.S. economic outlook”. They also noticed that business fixed investment remained soft, trimmed the projected rates of productivity gains and potential output growth over the medium term, and expected net exports to continue to subtract from GDP growth over the second half of the year, due to the strengthening greenback.
Regarding inflation, “some participants cited downside risks, pointing to the absence of any noticeable response of inflation to the reduction in resource slack over the past several years, risks of further declines in oil and commodity prices, and the possibility of further appreciation in the dollar”. And almost all members indicate that they “would need to see more evidence that economic growth was sufficiently strong and labor markets conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee's longer-run objective over the medium term”.
At the end, we provide the FOMC’s breakthrough discovery. “Some participants also discussed the risk that a possible divergence in interest rates in the United States and abroad might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports”. Is it time to notify the Nobel committee?
The bottom line is that the July minutes showed that central bank officials were mixed – or even slightly dovish as they realized some downward risk on GDP growth and inflation – on whether to raise short-term interest rates next month. The lack of any clear signals just four weeks before the Fed’s next meeting reduced the possibility of a September move. This is probably why the price of gold was rising after the publication of the minutes and reached its highest in nearly five weeks on Thursday. However, the shiny metal will likely remain under pressure from the expectations of an interest rate hike later this year.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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