On Wednesday, the Federal Reserve released not only their most recent monetary policy statement, but also updated its newest economic projections. How can they influence the gold market?
FOMC participants submitted their individual economic projections for the June meeting. The Fed officials’ projections for the unemployment rate were essentially unchanged. However, U.S. central bankers upgraded their median inflation projection for this year from 1.2 percent in March to 1.4 percent. This change is rather hawkish as higher inflation could prompt the Fed to more aggressive actions. However, FOMC participants downgraded their median real GDP growth projection for this year from 2.2 percent in March to 2 percent and for the next year from 2.1 percent in March to 2.0 percent.
Moreover – and this is probably the most important change in FOMC economic projections – U.S. central bankers revised down their projections for the federal funds rate. Although the median outlook remained unchanged for this year, for 2017 the median projection is 0.3 percentage points lower than in March (it now stands at 1.6 percent), while for 2018 the median projection is 0.6 percentage points lower than in March (it now stands at 2.4 percent). The projected federal funds rate in the longer run was reduced by 0.3 percentage points to 3.0 percent. It means that the Fed lowered its path for the federal funds rate again. Moreover, although the median projection for interest rates for this year was unchanged, a number of participants revised down their projections. Indeed, the number of Fed officials who see just one hike this year rose to six from one in March. And the number of FOMC participants who see more than two hikes this year declined from seven to just two. It means that the Fed has become more dovish, which should be welcomed by gold bulls.
The take-home message is that the Fed reduced its projections for the federal funds rate in 2017 and 2018, while more FOMC members adopted a more dovish stance. In consequence, the market odds of a July hike collapsed to 7 percent. Actually, investors do not see any interest rate hikes this year, according to the CME Group FedWatch. It is great news for the gold market, as the price of shiny metal has recently been negatively correlated with the expectations of the Fed’s path for the federal funds rate. Indeed, gold rallied on Thursday, surging above $1,300. Moreover, the Fed officials see stagflation as more likely, as they raised inflation expectations and lowered growth expectations. Stagflation means inflation with stagnation. That is bad for asset markets – except the precious metals market, as gold usually shines in such an environment.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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