Yesterday, the minutes of the Federal Reserve's September meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?
On the one hand, the recent minutes do not say anything we already did not know thanks to Yellen’s press conference and the publication of economic projections. The minutes reiterated the same song that everything is fine, but inflation is (temporarily) low, so we need more information to hike.
On the other hand, FOMC members addressed a few interesting issues. First, it seems that concerns about China were very important for the Federal Reserve’s decision to keep interest rates near zero:
“Many [members] acknowledged that recent global economic and financial developments may have increased the downside risks to economic activity somewhat”.
We are not convinced. With the improved situation in the labor market (at that time) and core inflation at 1.8 percent, China was just a convenient excuse not to hike (investors should remember that the U.S. accounts for only about 8 percent of China’s imports, and its exports to China represent less than 1 percent of its GDP).
Second, the minutes were interpreted as relatively dovish, since some participants “judged that the downside risks to the outlook for economic growth and inflation had increased” and “indicated that their confidence that inflation would gradually return to the Committee's 2 percent objective over the medium term had not increased”. This is why the Fed decided that it would be “prudent” to wait for more data to confirm that the economy is strong enough to hike interest rates:
“In part because of the risks to the outlook for economic activity and inflation, the Committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members’ confidence that inflation would gradually move up toward 2 percent over the medium term”.
Undoubtedly, if officials are still not confident about it, they will never be. The next excuse may be the disappointing September U.S. Nonfarm Payrolls, which are the very reason why the September minutes are not relevant, or at least the part of them below:
“Members agreed that labor market conditions had improved considerably since earlier in the year, with ongoing solid gains in payroll employment and the unemployment rate falling to a level quite close to their estimates of its longer-run normal rate”.
As the September FOMC minutes were interpreted as dovish, the rate-hike odds fell, while the price of gold initially increased, but eventually turned lower as stocks rallied. Such behavior confirms that the possible hike does not have to be negative for the gold market, as stocks would suffer then.
The key takeaway is that the September FOMC minutes were relatively dovish. The whole situation is a bit ironic, because the expectations that the Fed will hike caused the appreciation of the U.S. dollar and global funding stresses. Now, the FOMC members are saying they cannot hike because of global risks that they have created themselves. The publication of the dovish minutes should have been positive for the price of gold, but it wasn’t, since the extended ZIRP supports the stock market and the expectations of tightening (still unfulfilled due to the continuous postponing of hikes) exert downward pressure on the price of gold.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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