Yesterday, the Federal Reserve released their most recent monetary policy statement. How can it affect the gold market?
As expected, the Fed kept interest rates unchanged at between 0.25 and 0.50 percent (interestingly, Kansas City Fed President Esther George dissented for a second meeting in a row). The main reason for such a decision was the low inflation rate, as labor market conditions have improved further since March. The Fed noticed a slowdown in economic activity, slow business fixed investment and net exports. However, the biggest concern was definitely inflation, as it was “expected to remain low in the near term”. Moreover, market-based measures of inflation compensation remain low.
The Fed was slightly more dovish than expected, given the relative improvements abroad and in the U.S. financial situation. Surely, the U.S. central bank removed a reference to global events posing risks to outlook, but it failed to send any other hawkish signals that it really considers hiking interest rates in June. It seems that the Fed wants to be sure that inflation is heading higher before any move. Another explanation is that the U.S. central bank does not want to hike rates in an election year. Assessing the economic conditions, the FOMC downgraded economic activity, while the rest of the statement looks pretty much the same as the March version. Importantly, the Fed did not alter its forward guidance:
“In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
The price of gold declined after the release, but trading ended slightly higher than the previous close. Perhaps, investors initially interpreted the Fed’s message as dovish (due to the degradation of economic activity). Today, gold has been shining so far, as the U.S. dollar fell against the yen after the Bank of Japan kept the monetary policy steady.
The bottom line is that the Fed kept its interest rates unchanged. The U.S. central bank removed a reference to global events posing risks to the outlook, which means that June is on the table (but most investors do not believe in a hike in June, especially that the UK referendum takes place a week later). On the other hand, the FOMC downgraded its assessment of economic activity and did not change its dovish stance from March. On balance, the Fed’s recent statement was rather neutral or slightly dovish. It is good news for the gold bulls. The longer the Fed holds off on raising rates, the better for gold. The markets now expect only one interest hike this year, not earlier than in November.
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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.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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