On Thursday, Fed Chair Jane Yellen delivered a speech entitled “Inflation Dynamics and Monetary Policy” at the Philip Gamble Memorial Lecture, University of Massachusetts. What can we learn from it?
Those who wanted to hear a confirmation that there would be no rate increase this year could be disappointed. The comments from Yellen were more hawkish than expected. She stated that “on balance the economy is no longer far away from full employment”, while “the Committee expects that inflation will gradually return to 2 percent over the next two or three years”. Undoubtedly, one may ask why the Fed did not hike interest rates in September if everything is so good. But financial markets decided not to worry about such details and fully trust the promise of a nice old lady, who was struggling with her speech.
Why not trust her? She said that:
“most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective”
Yellen reiterated the willingness to hike in the conclusions:
“Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”
Although she added at the end: “if the economy surprises us, our judgments about appropriate monetary policy will change” – a usual last-minute caveat – global markets rebounded on renewed trust in the U.S. economy. The reasoning goes as follows: if the Fed still wants to hike interest rates, the U.S. economy is strong enough to face it. This is why Yellen’s comments were bullish for the stock markets and the greenback, while negative for the price of gold, which fell almost 1 percent after the speech.
To sum up, the recent Yellen’s speech was more hawkish than expected, as she stated readiness to raise interest rates this year. Thus, her remarks significantly contrast the last FOMC statement. It seems that the Fed is playing with the markets and Yellen’s remarks were made only to convince investors about the strength of the economy. As long as markets believe her, gold’s upside potential will be limited.
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If you enjoyed the above analysis, we invite you to check out our other services. We focus on the fundamental analysis in our monthly Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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