Fed officials gave several speeches this week. What can we learn from them?

This was a busy week for U.S. central bankers. On Sunday, Fed vice chairman Fischer provided a lecture in Lima, Peru. On Monday, Atlanta Federal Reserve Bank President Dennis Lockhart, Chicago Federal Reserve Bank President Charles Evans and Federal Reserve Governor Lael Brainard delivered speeches. Others U.S. officials spoke in the media. And New York Federal Reserve Bank President William Dudley and Cleveland Fed President Loretta Mester are due to speak today. The Fed is much more transparent than a few decades ago, but now we are overloaded by information, which makes us even more confused about the direction of monetary policy, especially that the Fed is divided and central bankers send conflicting signals. However, investors should take all reports about an internal split at the Fed with a pinch of salt. As a remainder, during the September meeting, only Lacker dissented and wanted to hike.

But let’s briefly analyze the speeches. Fischer did not say anything new. He noticed the recent disappointing payroll report, but believed that “the pace of job growth is still sufficiently strong gradually to erode slack in the labor market”. What is important is that the Fed vice chairman sounded more dovish than usual. He said that a rate hike this year was “an expectation, not a commitment” and noticed that Fed had to remain “cognizant of the risks ahead”.

Brainard’s speech was much more interesting. She basically ridiculed Yellen’s policymaking approach based on the so-called Phillips curve (by the way, a few Nobel prizes have been won for debunking the Phillips curve). She also paid a lot of attention to foreign developments and analyzed how they could affect the U.S. outlook. She noticed a few channels:

“First, weak growth abroad reduced demand for U.S. exports. Second, the expected divergence in U.S. growth increases demand for U.S. assets, putting upward pressure on the dollar, which, in turn, weighs on net exports. The estimated effect of dollar appreciation on net exports has been shown to be substantial and to persist for several years. Weak demand weighs on global commodity prices, which, together with the effects on the dollar, restrains U.S. inflation. Finally, the anticipation of weaker global growth can make market participants more attuned to downside risks, which can reduce prices for risky assets, both abroad and in the United States--as we saw in late August--with attendant effects on consumption and investment.”

These remarks are very important, because they show that recent economic problems of emerging markets would likely strengthen the U.S. dollar, which would be negative for the price of gold. As Fischer, she also concluded in a dovish manner, saying that the Fed should take a stance of “waiting to see if the risks to the outlook diminish.”

Federal Reserve Governor Daniel Tarullo echoed that view saying: “right now my expectation is – given where I think the economy would go – I wouldn’t expect it would be appropriate to raise rates” this year. Evans believes that the best choice is the middle of 2016, while Lockhart sees “a liftoff decision later this year at the October or December FOMC meetings as likely appropriate”. Lacker is ready to hike, as always.

Summing up, on the surface there is an internal split at the Fed (indeed, two members of the Fed’s Board of Governors called into question Yellen’s speech, which is not too often seen). However, most of the Fed officials are dovish and – what is the most important – more dovish than a few weeks ago. In our view, the most likely time of a rate hike is now the first quarter of 2016, however, everything is possible. This postponement should be supportive for the price of gold (in the short term), but the current foreign developments are positive for the U.S. dollar, which is not good news for the gold market.

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

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