On Wednesday, Trump nominated Goodfriend to the Fed’s Board of Governors. What does it mean for the gold market?

Important Week in Central Banking

Last week was full of important events for the Fed. On Tuesday, there was a congressional hearing of Jerome Powell, while the following day Janet Yellen gave her last testimony as the Fed Chair before the Congress. The conclusion from these two testimonies is that the December hike is coming and that Powell will probably continue Yellen’s monetary policy of gradual tightening. But last week was marked by one more important event: President Donald Trump nominated economist Marvin Goodfriend to serve as a Federal Reserve governor.

Who is Marvin Goodfriend?

Who is the recent nominee? He was born in 1950 in New York. Currently, he is a professor of Economics at Carnegie Mellon University, but he has experience in central banking, as in 1993-2005 he was director of research and policy advisor at the Federal Reserve Bank of Richmond.

What are Goodfriend’s Views on Monetary Policy?

When it comes to views on the monetary policy, Goodfriend has a reputation as a free thinker, as he is a member of the Shadow Open Market Committee, an independent group of economists who analyze and criticize the monetary policy and decisions of the Federal Open Market Committee. This is why his choice is considered as a victory for conservatives who want to reshape the Fed’s approach to monetary policy. Goodfriend does not like inflation higher than 2 percent, and supports a rule-based monetary policy, as it would limit the arbitrariness of monetary policy and curb inflation. He also criticized the three rounds of quantitative easing, especially the purchases of mortgage-backed securities.

Is Goodfriend a Hawk?

Hence, there are some grounds to consider Goodfriend as a monetary hawk, which is bad news for the gold market. However, it is not so simple, as Goodfriend is first of all a big supporter of price level stability. Hence, given that inflation is subdued, he does not have to support a tight monetary policy. Actually, the opposite might be true. In a paper written for the Kansas City Fed’s Jackson Hole symposium in August 2016, Goodfriend made a case “for unencumbering interest rate policy altogether so that negative nominal interest rates can be made freely available and fully effective as a realistic policy option in a future crisis.” It goes without saying that negative interest rates would be very positive for the yellow metal.

Conclusions

To sum up, Trump nominated Marvin Goodfriend to the Board of Governors of the Federal Reserve. If confirmed he will strengthen the position of academic economists at the Board. Many analysts also believe that Goodfriend could shake the Fed, as he supports a more rule-based approach. This is possible, of course, but it does not automatically imply a more hawkish Fed. Any value gained by introducing a rule will be lost when the said rule would allow for negative interest rates. The conclusion is that Goodfriend does not have to be negative for the gold prices – his commitment to price stability could actually make him opt for easy monetary policy in times of low inflation. Stay tuned!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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