The Federal Open Market Committee meets this week. What can we expect from the Fed and how can it affect the gold market?

Markets do not expect any big moves by the Fed. The odds for an interest rate hike in January are only 11.9 percent. Therefore, the U.S. central bankers are widely expected to leave the federal funds rate unchanged at 0.25-0.50 percent.

However, investors count on hints from the Fed on future hikes, but it is unlikely that the U.S. central bank will change its language and abandon its dependence on economic data. The FOMC members will probably acknowledge the risks to the outlook from tighter financial conditions, low oil prices and developments abroad (China). Actually, heightened volatility in the financial markets reflects tighter financial markets, therefore the markets has already done the Fed’s job.

Thus, given the current economic environment, the FOMC statement should be dovish, but to what extent? Another unknown are the new voting FOMC members. Regional Fed presidents Rosengren, Mester, George and Bullard will replace Evans, Williams, Lockhart and Lacker. Evans was an outspoken dove, while Lacker was a radical hawk, so they cancel each other out. Williams and Lockhart were rather moderate, while the three of the new voting members are generally hawks (Mester, George and Bullard) and only Rosengren is a dove. Therefore, the center of gravity could move towards hawks in 2016, which is not good news for the gold market. However, if the economic data remains weak, even hawks should not vote for further hikes.

The key takeaway is that the FOMC meets this week. It is highly unlikely that it will raise interest rates in January, but it may provide insightful hints regarding the Fed’s stance and future course of monetary policy. The median projection in December suggested four quarter-percentage-point hikes in 2016, however, the recent turmoil lowered the markets’ expectations to only one hike. In our last Market Overview, we pointed out that the FOMC’s projections of the fed funds rates are completely unreliable, so the worrisome U.S. economic recent data may prompt the Fed into a more gradual tightening cycle than expected, which should be bullish for the price of gold. Perhaps, this is actually what we are observing in the gold market – the price of gold is rising on expectations that the Fed’s monetary policy will be softer than previously thought. Respectively, any hawkish hints could exert downward pressure on the price of gold.

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

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