Yesterday, the minutes of the Federal Reserve's December meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?

Compared to the post-meeting statement, the minutes are dovish. Why? The decision to raise rates was unanimous, but the minutes show that it was a “close call” for some FOMC members. Inflation remained a major concern among the U.S. central bankers:

Also, a number of participants pointed out that because inflation was still running well below the Committee’s objective and the outlook for inflation was subject to considerable uncertainty, it would probably take some time for the data to confirm that inflation was on a trajectory to return to 2 percent over the medium term. Gradual adjustments in the federal funds rate would also allow policymakers to assess how the economy was responding to increases in interest rates. In addition, by several estimates, the neutral short-term real interest rate was currently close to zero and was expected to rise only slowly as headwinds restraining the expansion receded.

The paragraph above clearly indicates that any further interest rate hikes would be gradual (mostly due to concerns about persistent low inflation, but FOMC members cited also other downside risks, as the further U.S. dollar appreciation or the situation in China). Thus, the minutes were interpreted as dovish and softened market expectations of the path of rate hikes. In consequence, the U.S. dollar fell and the price of gold rose to $1,091.40 (London PM Fix) yesterday.

The minutes confirm our opinion that the U.S. central bank will end up doing less than it thinks. Fed officials try to assure us that they could raise interest rates three up to five times this year, but the market is now pricing in only two hikes.

The key takeaway is that the December FOMC minutes are dovish as they reveal many concerns among the Fed officials, primarily about persistently low inflation. These concerns mean that the U.S. interest rates are not going much higher anytime soon. The recent turbulences in China and global stock markets are making a very gradual path of hikes even more likely. Therefore, the minutes are bullish for gold.

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

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