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Three Key Takeaways from December 2017 FOMC Minutes for Gold

Commodities / Gold and Silver 2018 Jan 05, 2018 - 06:46 AM GMT

By: Arkadiusz_Sieron

Commodities

Yesterday, the minutes of the FOMC December meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?

The Fed Is Divided over Number of Hikes in 2018

At the December meeting, the U.S. central bank increased the federal funds rate by a quarter percentage point to a range 1.25-1.50 percent. The move was widely expected by investors, but there was no unanimity at the meeting as two FOMC members dissented. The Fed officials were also divided over the forecast of three rate hikes in 2018. The hawks noted that more hikes would be appropriate as financial conditions had not tightened since the Fed started raising rates at the end of 2015. On the other hand, the doves pointed out that too aggressive hiking might prevent a sustained return of inflation:


A few participants indicated that they were not comfortable with the degree of additional policy tightening through the end of 2018 implied by the median projections for the federal funds rate in the December SEP. They expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent, or that the level of the federal funds rate might already be near its current neutral value. A few other participants mentioned that they saw as appropriate a pace of additional policy tightening through the end of 2018 that was somewhat faster than that implied by the December SEP median forecast. They noted that financial conditions had not materially tightened since the removal of monetary policy accommodation began, that continued low interest rates risked financial instability in the future, or that the labor market was increasingly tight.

However, the division will soften in 2018. The Committee will be more hawkish in 2018. Why? The biggest doves who dissented at the last meeting, Neel Kashari and Charles Evans, are not voting members in 2018. What does it mean? The risks to the forecast of three rate hikes are not balanced, but biased upwards. Currently, investors accept the forecast, with the market odds of a March hike at about 68 percent. If the expectations turn to be more hawkish over the year, gold may be under pressure. You have been warned.

Fed Doesn’t Believe in Huge Effects of Tax Reform

The last minutes showed that the FOMC members expect that the Republican tax plan will have only a modest impact on the economy. They revised up their forecast for real GDP growth beyond 2017, as the changes in the tax code would likely provide a modest boost to consumer and capital spending.

Beyond 2017, the forecast for real GDP growth was revised up modestly, reflecting the staff's updated assumption that the reduction in federal income taxes expected to begin next year would be larger than assumed in the previous projection. The staff projected that real GDP would increase at a modestly faster pace than potential output through 2019.

However, the Fed officials stated that the magnitude of the effects was uncertain, as companies could use the increase in cash flow for debt reduction or stock buybacks. Only time will tell the exact effects – we expect that the tax reform will benefit the U.S. economy, which is not good news for the gold prices. The near-term benefits are rather priced in the market, but investors haven’t taken all longer-term benefits into account yet. Remember. As the reform gives companies incentives to build plants in the United States rather than overseas, we are likely to see an increase in capital spending.

No Agreement on Inflation Outlook?

The debate about the path of rates was closely linked to the inflation outlook. The doves believe that the low inflation could remain soft. However, they were in the minority, as the FOMC members generally viewed the medium-term outlook for inflation as little changed. The majority of them continued to “expect inflation to gradually return to the Committee’s 2 percent longer-run objective.”

Indeed, “the staff projected that inflation would be very close to the Committee's 2 percent objective in 2019 and at that objective in 2020.” And “the risks to the projection for inflation also were seen as balanced.”

So much for low inflation as the reason for a more dovish Fed in the near future. The opposite is actually more probable, given all the personal changes in the composition of the FOMC.

Conclusion

The minutes from the latest FOMC meeting were rather hawkish. The U.S. dollar increased in a response, while the price of gold declined, as one can see in the chart below.

Chart 1: Gold prices over the last three days.


The FOMC members are still seeking a gradual rise in the U.S. interest rates, despite the internal division over the subdued inflation. In 2018, the biggest skeptics in such approach won’t vote, so we expect a more hawkish Fed. It should be a tailwind for gold. However, the first meeting with the new composition will tell us more. Stay tuned!

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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