This week is so full of important events, that we are not able to cover them all. This is why we are focusing in this Gold News Monitor on yesterday’s speeches given by Stanley Fischer and John Williams, two FOMC voting members. What are the implications of their remarks for gold prices?
Let’s start with the Fed’s Vice Chairman Stanley Fischer who gave a speech at the Economic Club of New York. He reiterated the March statement that a hike will be appropriate when the Fed sees "further improvement in the labor market" and is "reasonably confident” that “inflation is moving back to 2 percent”. Fischer pointed out: “the unemployment rate, at 5.5 percent in February, is nearing estimates of its natural rate, and we expect that inflation will gradually rise toward the Fed's target of 2 percent.”
Thus, he believes that the federal funds rate will likely increase before the end of this year, but “a smooth path upward in the federal funds rate will almost certainly not be realized”.
The impact on the gold market seems to be mixed. On the one hand, the gradual and correctly anticipated Fed’s tightening should be negative for gold prices; however some uncertainty about the level of future interest rates and periods of easing in the tightening cycle may support the yellow metal’s performance.
The President of the Federal Reserve Bank of San Francisco, John Williams, was also very optimistic about the U.S. labor market in his presentation to Australian Business Economists. He said: “the U.S. economy and labor market are on the mend and closing in on the full employment goal. My view is that we will reach maximum employment by the end of this year, if not sooner.”
Williams argued also that inflation would be moving back toward its target within the next few years (due to wage pressures and the transitory impact of the low energy prices and a stronger greenback on the inflation rate). In consequence, he believes that the process of normalizing monetary policy, i.e. the interest rate hike, should start this year. To be precise, Williams said: “I think that by mid-year it will be the time to have a discussion about starting to raise rates” and “it would be appropriate to start weighing the pros and cons of taking action at that time”.
It seems a bit conservative, taking into consideration his surprisingly positive outlook for the U.S. economy (“the economy is showing solid momentum and there’s good news in virtually every sector”). Why not hike but only start the discussion if everything is so rosy?
However, his statement does not preclude a hike in September or October. Investors should remember also that, as Williams pointed out, “the decision to raise rates is actually three decisions: Not just when, but how quickly and how high”. He advocates an earlier hike to make the tightening cycle more gradual. Therefore, the sooner rather than later hike would not necessarily be negative for the gold market if it was more gradual than expected. Conversely, the later rather than sooner could be negative for the yellow metal prices if the future path was sharper than expected.
Fortunately for the gold market, for now, investors are forecasting that the initial hike will occur later and the whole tightening cycle will be conducted slower than they had thought before the March FOMC statement.
The key takeaway is that nothing has really changed since the Fed’s March statement. Two voting FOMC members seem to be unaware that their Committee has downgraded economic projections and they presented a rosy outlook for the U.S. economy. According to them, it warrants the Fed’s initial hike this year, however, they added their beloved caveat that the Fed’s decisions are data-driven.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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