Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19
The Unknown Tech Stock Transforming The Internet - 10th Sep 19
More Wall Street Propaganda - 10th Sep 19
Stock Market Price Structure Still Suggests We Are Within Volatile Rotation - 9th Sep 19
Stock Market Still Treading Water - 9th Sep 19
Buying Pullbacks in Silver & Gold - 9th Sep 19
Government Spending - The High Price of a "Free Lunch" - 9th Sep 19
Don't Worry About a Recession - 9th Sep 19
Large Drop in Stocks, Big Rally in Gold and Silver - 9th Sep 19
US Stock Market Hasn’t Cleared The Storm Yet - 8th Sep 19
Precious Metals Were Ripe for a Pullback - 8th Sep 19
Market Chart Patterns to Spot High-Confidence Trading Opportunities in a "Pinch"! - 8th Sep 19
Five Feet High And Rising - Stock Market Bulls False Sense of Security - 8th Sep 19

Market Oracle FREE Newsletter

The No1 Tech Stock for 2019

Will Fed’s Dovish Shift Support Gold?

Commodities / Gold & Silver 2019 Jan 31, 2019 - 05:29 PM GMT

By: Arkadiusz_Sieron

Commodities

Big win for the doves! And for gold, as it jumped above $1,320 amid the soft FOMC statement. What’s next?

Committee Will Be Patient

Yesterday, the FOMC published the monetary policy statement from its latest meeting that took place on January 29-30th. In line with the expectations, the US central bank unanimously kept the federal funds rate unchanged at the target range of 2.25 to 2.50 percent (the Fed also kept other interest rates unchanged and reaffirmed its “Statement of Longer-Run Goals and Monetary Policy Strategy”):

In support of these goals [maximum unemployment and price stability], the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.


The pause in hiking was not the only change in the statement from the December version. First, the assessment of the economic activity was revised downward a bit. It was described as rising at a ‘solid’ rate, while one month earlier it was a ‘strong’ rate. The next two changes are much more important. The FOMC dropped its pledge of “further gradual” rate hikes. In December statement, one could find the following sentence:

The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.

Now, it’s gone. Instead, the FOMC included a sentence in which it announced being patient:

In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
That decisions seem to be incomprehensible given “generally strong U.S. macroeconomic performance”, as Powell put it. However, the problem is that the Fed has seen some cross-currents and conflicting signals about the outlook, mainly the slowdown in economic growth in China and Europe, unresolved trade tensions or uncertainty about Brexit. Hence, the growing evidence of cross-currents pushed the Fed to become more patient awaiting greater clarity.

The wait-and-see approach is not only about the risk-management. Another justification is the weakened case for raising the interest rates due to the lack of inflationary pressures and receded risks of financial imbalances:

In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished.

And What About Balance Sheet Normalization?

The Fed also released a statement on the balance sheet normalization. It indicated it’s willingness to adjust the size of its balance-sheet runoff, although it was supposed to work on an autopilot:

The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.

Moreover, the Fed announced that it would continue to use administered rates to control the policy rate, with an ample supply of reserves. It means that, as we explained it to our Readers a long time ago, the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet, than in previous estimates.

Implications for Gold

To sum up, the FOMC was dovish both on the interest rate policy and the balance sheet policy. Although Powell denied that there is a “Powell put”, he said everything what the markets wanted to hear. Or, even more, as the FOMC statements and Chair’s press conference were actually more dovish than expected. In consequence, the stock markets went up, while the U.S. dollar declined against the euro or the Japanese yen (see the chart below).

Chart 1: USD/JPY exchange rate from January 29 to January 31, 2019.


So, the price of gold jumped above $1,300 in the response to the dovish signals from the Fed, as one can see in the chart below.

Chart 2: Gold prices from January 29 to January 31, 2019.

Will it be just a temporary spike or will we see a continuation of the rally? Well, it’s never easy to say, but the addition to the FOMC statement the part about being patient implies that the Fed will not hike interest rates in the next few months at least. It means that the greenback will not be supported by the Fed’s tightening. With weaker US dollar, gold has more room to go up.

To be clear: the interest rate hike are still possible in 2019, when the uncertainty clears a bit and all these cross-currents calm. However, a big dovish shift in the Fed’s stance should support the yellow metal for some time (and unless investors, now with Powell’s put at hand, shift into riskier assets).

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.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules