Yesterday, the Federal Reserve released their most recent monetary policy statement. How can it affect the gold market?

As widely expected, the Fed kept its key funds rate near zero. It was the 54th meeting in a row when the U.S. central bank left interest rates unchanged. As before, the Fed said that economy had been expanding moderately and cited moderate growth in household spending and improvement in the housing sector. The labor market continued to improve, while inflation continued to run below the Committee's longer-run objective, and business fixed investment and net exports stayed soft.

What is the most important is that the FOMC did not provide any signals indicating that it was ready to move, sticking to the idea that it would only decide whether to hike rates on a meeting-by-meeting basis. However, in our opinion this precludes September. Futures traders seem to think the same, as they cut their bets on September and increased them on December, according to the CME Group’s FedWatch tracker.

Of course, there is plenty of time between now and the September meeting for the FOMC to assess new data and prepare markets for a possible hike. In particular, two more employment reports will have been released by then, which could convince the FOMC members to raise interest rates. Indeed, the labor market will be in the center of attention, since “the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate 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”.

Adding “some” was the most important wording change, since previously the Fed had said it needed to see improvement. For certain analysts it was a hawkish change, because “some improvement” means less than “improvement” alone. We do not agree with that, since “some” means “being of an unspecified amount or number”. It is rather probable that the Fed has simply no idea where the economy is going and what should be the ‘optimal’ monetary policy. This is why they have been reiterating the same babble for months.

There was one more notable change, as the June fragment “energy prices appear to have stabilized” was removed from the last statement. It is interesting, isn’t it? So much for “transitory” factors behind the low inflation.

The key takeaway is that the Fed shed no light on anything. Inflation is still low, but the labor market has continued to improve. However, some further improvement in the labor market is needed before a possible hike. Although the September hike is theoretically still on the table, it is less probable after the July meeting. We bet that the Fed will hike interest rates modestly not earlier than in December just to show that it remembers how to do it and to defend its credibility. The more delayed and gradual the tightening, the better for the gold price. Indeed, the price of gold increased after the relatively dovish FOMC meeting.

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

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