On Friday, the Fed Chair Janet Yellen delivered a speech entitled “The Outlook for the Economy” at the Providence Chamber of Commerce, Providence, Rhode Island. What can we learn from it?

In some respects, we did not hear anything new. Yes, the U.S. economy “may have slowed” in recent months, however, this slowdown was “largely the result of a variety of transitory factors”, like the unusually harsh winter and the labor disputes at ports on the West Coast. So, do not worry, when these transitory influences wane, the economy will continue to improve, and we will hike interest rates. Of course, this initial step in the gradual process of normalizing monetary policy is data-dependent (there must be improvement in labor market conditions and there must be confidence that inflation will move back to the 2 percent level).

And if these transitory effects do not wane, it will mean that they are only “statistical noise”, as any apparent weakness. It does not matter that the Federal Reserve Bank of Atlanta is now predicting GDP growth at only 0.7 percent for the second quarter, because other parts of the Fed, i.e. the FOMC, “call for growth in real gross domestic product of roughly 2-1/2 percent per year over the next couple of years”.

The first really interesting thing in Yellen’s speech is that she publicly admitted something everybody senses: the Fed’s projections are useless, since no one can know the future.

“I am describing the outlook that I see as most likely, but based on many years of making economic projections, I can assure you that any specific projection I write down will turn out to be wrong, perhaps markedly so.”

The second important issue is that Yellen seemed to be a bit more pessimistic on the outlook for the U.S. economy. She said: “the headwinds facing our economy have not fully abated, and, as such, I expect that continued growth in employment and output will be moderate over the remainder of the year and beyond”. However, she is still excessively optimistic and believes that it will be appropriate at some point this year to hike the interest rates. According to Yellen, “the U.S. economy seems well positioned for continued growth. Households are seeing the benefits of the improving jobs situation, and consumer confidence has been solid. In addition, the drop in oil prices amounts to a sizable boost in household purchasing power.” This is not true, because consumer confidence is actually plunging. And Yellen does not understand that any savings on energy are used to pay off debts, or to cover increasing rents and medical costs.

Third, Yellen acknowledged that “the most important factor determining living standards is productivity growth”. The sluggish productivity growth is the reason we do not see rising median incomes in the U.S. And, well, the current monetary policy is unlikely to help, because the problem does not lie on the demand side. The problem is the high regulatory burden and unconventional monetary policy, which lead to regime uncertainty. It is a concept which refers to the pervasive uncertainty that investors face over the security of their property rights and the income it yields. Because of this uncertainty (just think about quantitative easing, bailouts, the Eurozone crisis, Obamacare etc.), investors are afraid to invest. This is why the pace of business investment has been so modest during the recovery.

The key takeaway is that Yellen acknowledged the recent economic slowdown, however, she still believes that economic data will improve and warrant an interest rate hike this year. On the other hand, as the Fed chair pointed out, transitory factors have not fully abated and wages will not rise without an improvement in productivity, which is good news for the gold market, as sluggish productivity growth may delay the interest rate hike. Taking into account the uselessness of economic projections, noticed by Yellen herself, investors should always take the Fed’s forecasts with a pinch of salt. The U.S. economy seems to be in a much worse shape that it is painted by the Fed’s officials. This should support the gold prices.

Thank you.

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

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