Janet Yellen's, the Federal Reserve chair, testified yesterday to the Senate Banking Committee. Is there anything new in her remarks? What do they mean for the gold market?

Many analysts expected that the testimony could be a bit more hawkish than the previous minutes due to positive signals from the labor market. Although Yellen noticed the “employment situation in the United States has been improving along many dimensions” her speech was rather dovish. The key part of the testimony is as follows:

The FOMC's assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.

The crucial question is what “couple” really means, however it seems that the hike may not be expected earlier than in June or the second half of the year. Why would the Fed be patient in beginning to raise the federal funds rate? Yellen pointed out three main factors. First, “inflation remains well below longer-run objective” (the decline in oil prices is again a scapegoat).

Second, the Fed’s chair discovered in the summary the same thing as we did in one of our previous articles, i.e., that the labor market is not as strong as it is commonly believed: “too many Americans remain unemployed or underemployed, wage growth is still sluggish.” It was a quite predictable opinion, because “the wage growth should be around 3.5-4 percent to be consistent with a healthy job market, according to Yellen.”

Third, the Fed’s chair noted that “foreign economic developments could pose risks to the outlook for U.S. economic growth” and she specifically pointed out the slowdown in China (where “economic growth could slow more than anticipated as policymakers address financial vulnerabilities and manage the desired transition to less reliance on exports and investment as sources of growth”), about which we wrote yesterday.

Yellen told also that if the Fed were to remove the word ‘patient’ in describing its approach to rate hikes, it would not necessarily mean that Fed would hike rates in a couple of meetings. “Instead the modification should be understood as reflecting the Committee's judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting”, she explained. Some analysts interpreted this part as preparing for change in forward guidance and the following hike (perhaps, this is why gold prices in the U.S. ended the day slightly lower), however we remain a bit skeptical about the Fed’s willingness to hike interest rate in the very low inflation environment.

The bottom line is that we still do not know whether (if ever) the Fed will raise interest rates. Yellen is playing this cat and mouse game in order to not shake the markets. Taking into account inflation below the target, sluggish wage growth and global risks, the Fed may be still ‘patient,’ even if it removes the word ‘patient’ from its dictionary. Thus, in the short run, i.e. the next few months, Yellen is rather not going to change interest rates. This is good news for precious metals investors, since low real interest rates are positive for gold prices.

Thank you.

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

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