Yesterday, the minutes of the Federal Reserve's October meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?
As usual, the recent minutes – as they are published with a significant lag – do not say anything we already did not know thanks to the October statement on the monetary policy or Fed officials’ speeches. However, the FOMC members addressed a few interesting issues. First, the minutes seem to be similarly hawkish as the recent statement:
“Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting”.
Second, the FOMC members changed their language to leave policy options open for the next meeting:
“Members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee's 2 percent objective over the medium term”.
In other words, investors should not be surprised if the Fed raises rates in December – it has been communicating this action since October. And economic data since the last FOMC meeting – especially the nonfarm payroll – has generally supported the Fed’s view that the labor market is tightening. The FOMC members indicated that “they would be assessing a range of labor market indicators over the period ahead to confirm further improvement in the labor market”, thus the strong October job market should imply a hike in December, provided the lack of some catastrophe in the November employment situation report.
Therefore, the October minutes should not be positive for the gold market, as they confirm that a Fed hike in December is a live possibility. However, the FOMC members pointed out that the tightening would be gradual:
“During their discussion of the likely path for the federal funds rate after the time of the first increase in the target range, participants generally agreed that it would probably be appropriate to remove policy accommodation gradually. Participants also indicated that the expected path of policy, rather than the timing of the initial increase, would be the more important influence on financial conditions and thus on the outlook for the economy and inflation, and they noted the importance of underscoring this view at the time of liftoff”.
Given that the expected path of policy could be really more important than the timing of the initial increase, the gradual and shallow pace of the monetary tightening may be not-so-bad news for the gold market. Perhaps this is why gold inched higher after the Fed minutes were released.
The bottom line is that the October FOMC minutes reiterated the recent statement on monetary policy. The Fed removed concerns about the global economy from its message and signaled that December “could well be” the time for a rate hike. This is not good news for the shiny metal, however, a pace of monetary tightening slower and shallower than expected should ease the downward pressure on the price of gold.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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