The FOMC members leaved interest rates unchanged. What does it mean for the U.S. economy and the gold market?

Despite months of expectations that the Fed would finally raise rates for the first time since 2006, the central bank’s officials reaffirmed the current 0 to ¼ percent target range for the federal funds rate. What is the rationale behind not raising interest rates? Well, the statement was clueless as usual, however, the answer may lie in this fragment:

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term”.

Translating from the Fed’s chatter to plain English, the U.S. central bank has become a hostage to Wall Street. Officially, the above excerpt refers to the current uncertainty in China and deflationary pressure, however, in reality the Fed – especially after the recent 10 percent correction in the stock market – is afraid to cause a market crash, as even a small increase in interest rates could be sufficient to pop the asset market bubble it inflated.

The committee repeated that it would raise rates when it has seen “some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term”. According to 13 of the 17 Fed officials, there will be at least one hike before the end of the year, however, the market does not see a hike either in October (Fed-funds futures priced in only a 16 percent probability), or in December (45 percent probability, according to the CME Group’s FedWatch Tool).

The yellow metal rose after the U.S. central bank left interest rates unchanged, however, the gains were limited to investment flows into equity markets. Some investors may not believe in hike rates this year and bid up the price of gold, but the uncertain situation and the possibility of rate hikes in the future could exert downward pressure on the shiny metal.

To sum up, the FOMC members chickened out again and left interest rates unchanged. The statement indicates that the Fed put itself in a role of the central bank for the world and loyal Wall Street supporter. Gold should initially gain, but the potential for further growth is limited due to the uncertainty about the Fed hike.

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

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