Gold Would Not Enjoy That FOMC Is Going More Restrictive
Fed Is Becoming More Hawkish
Yesterday, the Fed released minutes from the recent FOMC meeting. As everyone knows, the Committee hiked interest rates by another 25 basis points in September. But what about the future stance? Well, the minutes signal that the FOMC is going to be more hawkish in the near future (as we have been warning for some time). The key paragraph is as follows:
It means that only “a couple of participants” would not raise the federal funds rate above the neutral level without strong indicators of accelerating inflation which could risk overheating of the US economy. Meanwhile, the majority of them (this is our understanding of the sum of “a few” and “a number”) would not have any qualms to do that. The conclusion is clear: the restrictive policy is coming, brace yourselves!
Why Is Fed Tightening?
How the US central bank justified its hawkish stance? Well, the recent data is encouraging. Although inflation remains near 2 percent, it may modestly exceed the Fed’s target, as reports from business contacts indicate the rise in input prices due to the strong demand or import tariffs and the increased ability of domestic companies to raise the prices in an environment of trade wars.
Moreover, the labor market is tight. Job gains have been strong, while the unemployment rate dropped to a record low level. And many companies report difficulties in finding qualified workers, so some of them start to increase salaries. So there might be an acceleration in wages, which is another reason for adopting a more restrictive monetary policy.
Last but not least, household spending and business fixed investment has grown strongly so far this year, while the pace of economic growth has surprised positively a few of Fed officials:
What is important here is that “a couple of participants” related the uptick in economic growth not to the easy fiscal policy, which dissipate relatively quickly, but to the improve “productive capacity”, i.e. to the supply factors, which are key for the long-term economic development. If this is true, the solid pace of GDP growth might last even without fiscal stimulus, to the gold’s despair.
Implications for Gold
The recent FOMC minutes indicate that the US central bankers are more emboldened to extend the current tightening cycle. The gold market saw little immediate reaction to the publication, as one can see in the chart below.
Chart 1: Gold prices from October 15 to October 17.
(Click on image to enlarge)
However, they may signal problems for the precious metals in the long-run. The Fed officials are less concerned about the potential recession lurking around the corner and they consider further interest rates hikes, even temporarily above the neutral level. The rising yields should widen the divergence in monetary policies around the world and strengthen the US dollar. The minutes could, thus, bolster expectations that the Fed will raise rates again in December despite the recent stock market turmoil. As a reminder, traders lag behind the US central bank – if they reprice the odds of hikes in the upcoming months, the yellow metal may struggle. Stay tuned!
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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.