On Wednesday, the minutes of the Federal Reserve's April meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?
The minutes were rather more dovish than expected. FOMC participants noted the whole range of negative developments in the first quarter, including industrial production, housing and investment. The Fed’ officials considered this weak economic activity as largely transitory and caused by the severe winter weather and the labor dispute at West Coast ports, however, longer-term factors are finally starting to weigh on their stance:
“A number of participants suggested that the damping effects of the earlier appreciation of the dollar on net exports or of the earlier decline in oil prices on firms’ investment spending might be larger and longer-lasting than previously anticipated.”
Moreover, FOMC members noticed that sluggish income growth and high debt burden do not encourage consumers to spend more, even if they save some extra money on lower energy prices:
“In addition, the expected boost to household spending from lower energy prices had apparently so far not materialized, highlighting the possibility of less underlying momentum in consumer expenditures than participants had previously judged. Some participants expressed particular concern about this prospect, as their expectations of a moderate expansion of economic activity in the medium term, combined with further improvements in labor market conditions, rested largely on a scenario in which consumer spending grows robustly despite softness in other components of aggregate demand.”
Please notice that the situation has deteriorated since April, as consumer sentiment does not remain high any longer. Additionally, the Fed’s officials pointed to the global slowdown as an important international risk. They noticed that exports were a substantial drag on the growth of real GDP in the first quarter, especially exports to Canada and China. It confirms our view that the slowdown in growth in China and Canada may negatively impact U.S. growth.
The cautious tone was reflected in full in a discussion over the timing and pace of interest rate hikes, which was probably the most important part of the minutes.
“A few anticipated that the information that would accrue by the time of the June meeting would likely indicate sufficient improvement in the economic outlook to lead the Committee to judge that its conditions for beginning policy firming had been met. Many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility.”
It basically means that the June hike is off the table. It seems that next year is becoming more and more probable. According to the Wednesday’s statement of Chicago Federal Reserve President Charles Evans, “it likely will not be appropriate to begin raising the Fed funds rate until some time in early 2016”. Undoubtedly, it is good news for the gold market.
Summing up, the minutes of the Federal Reserve's April meeting were more dovish than expected. Some of the Fed officials not only noted the weak economic activity in the first quarter of this year, but also suggested that disappointing data reflected a longer-lasting loss of momentum in the economy. What is more important, FOMC members may become even more cautious in the next meeting, as they have seen a string of weak economic data since April. A less hawkish Fed would be, without any doubts, more supportive for the gold prices.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
Gold News Monitor
Gold Trading Alerts
Gold Market Overview
