The Fed’s April post-meeting policy statement was published yesterday. Let’s dive into the announcement and try to figure out what it means for the U.S. economy and the gold market.

The real U.S. GDP rose in the first quarter by merely 0.2. percent, according to the first estimate. As we believed, this number was much closer to the 0.1 percent forecast by the Atlanta Fed than the Bloomberg Consensus for 1.0 percent. The reality behind the number is probably much worse, because without a questionable negative price deflator and private inventory investment (due to unsold goods), the GDP growth would be rather negative.

However, the Fed does not see any problems. Everything bad is temporary and the future is bright. The most important part of the statement is that:

“Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors”.

So, Fed has finally acknowledged the slowdown of the U.S. economy. It has also pointed to the weakness in the country’s labor market, as “the pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed”. Moreover, it has also noted other negative factors: “growth in household spending declined… business fixed investment softened, the recovery in the housing sector remained slow, and exports declined”.

Thus, the question arises: why did the gold prices actually fall after the Fed’s statement release? The answer may be that investors believed the Fed officials (who were exceptionally unanimous) that the weak first quarter was really due to transitory factors and, consequently, the U.S. central bank did not change its monetary stance and liftoff time frame. In other words, the markets had probably expected a more dovish statement, while Fed, at least officially, did not rule out an interest rate increase later this year (it even, unlike in March, did not rule out hiking rates at its next meeting).

What are the implications for the future? Theoretically, a June move is possible, however the economic data is not cooperating. Economists see September as the possibly earliest time for interest rate hike, because a press conference will be held then and Janet Yellen could use her semiannual congressional testimony in mid-July to flag such a move ahead of time, however, investors are more pessimistic, since futures contracts indicate that the probability of a June rate hike is literally zero. The first month with a probability higher than 50 percent for an increase is December. We do not rule out anything; however, we believe that the slowdown is not necessarily temporary. Investors should be aware that bankruptcies in the energy sector usually lag oil price crashes by about a year (due to hedging activity), therefore the biggest problems of the energy sector may be still ahead of the U.S. economy. Moreover, contrary to the Fed’s opinion expressed in the statement that “consumers sentiment remains high”, the actual index of consumers sentiment plunged to 95.2 from 101.3 in April.

The key takeaway is that the Fed considers the weak economic activity in the first quarter as caused by some transitory factors, and financial markets desperately believe the Fed. However, April data indicates that the recent slowdown is not necessarily transitory. Although the gold prices fell after the statement release, they could gain in the future, as investors realize that the economic outlook is not as rosy as it is still commonly believed.

Thank you.

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

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