The minutes of the Federal Reserve's March meeting were released yesterday. They show that the Fed officials are split on when to raise interest rates. What does this mean for the gold market?
After the January minutes, we wrote that the Fed did not know when exactly the hike would occur (if at all) and that it did not have any idea how to assess whether the economic outlook warranted the beginning of normalization. The March minutes show that nothing has changed in this matter:
“Participants expressed a range of views about how they would assess the outlook for inflation and when they might deem it appropriate to begin removing policy accommodation. It was noted that there were no simple criteria for such a judgment…”
Actually, things are getting worse, because the Fed is now split on when to raise interest rates, with a couple of participants thinking about hiking not earlier than in 2016. The key part of the minutes is as follows:
“Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting. However, others anticipated that the effects of energy price declines and the dollar's appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016”.
It is notable that the Fed’s officials were divided before the March employment report, which was rather disappointing. Prior to the March job data, the labor market had been a bright exception among negative economic data. Now, after receiving poor data on the labor market (however, the The Kansas City Fed Labor Market Conditions Indicators improved from -0.330 in February to -0.262 in March), durable goods and so on, the Fed may be even more divided and more dovish.
However, the markets interpreted the minutes (as well as Dudley and Powell’s statements) as rather hawkish (compared with the March statement and Yellen’s press conference), which suggests that the first interest rate hike since 2006 is still on the table for this year (and some FOMC participants are still considering June as a proper time). According to the investors, the June hike is unlikely, but the probability of a September hike (estimated from the Fed’s funds futures) rose from 28 percent on April 7 to 33 percent today. This is probably why the greenback rose and gold fell after the release of the minutes.
Overall, the minutes are not groundbreaking. The Fed sees many uncertainties (such as the China’s slowdown or further appreciation of the dollar), however the risks to the outlook for economic activity and the labor market are considered as nearly balanced. Inflation is below the target, however it is a transitory phenomenon due to low energy prices. The U.S. central bank will be data-dependent, therefore economic data for March will be crucial, since it will definitely show whether the weak economic activity in January and February was due to the harsh winter or due to internal factors.
To sum up, the FOMC’s minutes were interpreted as less dovish than the statement and Yellen’s press conference in March. However, they showed that the Fed’s officials were split on when to raise interest rates with a couple of participants opting for the next year. It is worth noticing that this divergence of opinions was before the poor March employment report. We believe that the incoming data since then are overall rather negative and could further soften the Fed’s monetary stance, which would be positive for the gold prices.
P.S. Greece has repaid €450m it owed the International Monetary Fund, which also could weigh in on the gold prices, however the uncertainty over Greece is not over, as we pointed out yesterday.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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