Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed Embraces Higher Inflation. Will It Embrace Gold, Too?

Commodities / Gold & Silver 2020 Sep 06, 2020 - 06:35 PM GMT

By: Arkadiusz_Sieron

Commodities Fed adopts a new strategy that opens the door for higher inflation. The change is fundamentally positive for gold prices.

So, it happened! In line with market expectations, the Fed has changed its monetary policy framework into a more dovish one! This is something we warned our Readers in our last Fundamental Gold Report:

the Fed could change how it defines and achieves its inflation goal, trying, for example, to achieve its inflation target as an average over a longer time period rather than on an annual basis.



And it turned out that our worries were justified. On Thursday, the FOMC announced the approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. The change was timed for Fed Chairman Jerome Powell’s speech to the Jackson Hole economic symposium.

Generally speaking, the Fed declared that it will focus more on the job market and won't worry about higher inflation. This is because “a robust job market can be sustained without causing an unwelcome increase in inflation”, as Powell explained in his remarks discussing the policy shift.

Being more specific, the most significant changes to the framework document are:

• The Fed explicitly acknowledges the decline in the neutral interest rates and challenges for monetary policy in an environment of persistently low interest rates, in particular the effective lower bound. And, of course, these challenges will create excellent excuse to adopt even more dovish policies than currently implemented. After all, to overcome these challenges, the Fed is prepared to “use its full range of tools to achieve its maximum employment and price stability goals”,

• On maximum employment, the FOMC announced that its policy decision will be informed by the shortfalls rather than deviations of employment from its the maximum level. Oh boy, this is such a radical change! It means that the Fed will cease to worry about the overheating of the economy. In other words, the U.S. central bank drops the Philips curve. You see, in the past, the strong labor market meant that higher inflation could be just around the corner, which would be a reason to hike the federal funds rate. Now, the Fed could print money and ease its monetary stance like there’s no tomorrow! A great triumph of doves!

• And finally, on price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time.” It means that after periods of inflation rates below the target, the Fed would accept inflation rates above the target! As the revised statement states “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.” It’s a great change (at least in rhetoric, as we doubt whether the Fed ever worried about inflation since Volcker left the U.S. central bank), as it means de facto adopting price-level targeting. Undershoots of inflation are not forgotten, but they are made up for later. Of course, we are yet to see whether the Fed will manage to trigger higher official inflation rates (as successfully as asset price inflation), but shift allows the Fed to ease its monetary policy even further and to implement its dovish bias even stronger!

Implications for Gold

What does it all mean for the gold market? Well, the updated Fed’s strategy opens the door for easier monetary policy, ultra low interest rates for longer, and higher inflation. So, the shift is fundamentally positive for the gold prices. Actually, it could be the trigger that gold needed to continue its rally further north. However, the initial gold’s reaction has been negative (i.e., after a spike, there was a sharp reversal), as the chart below shows.



Of course, investors should remember that the updated strategy does not mean that we will see double-digit inflation tomorrow. The inflation has been under the Fed’s target for years, so it does not have to rise just because the Fed changed its monetary framework. And the FOMC wrote about inflation “moderately” above the target – yeah, we know that they couldn’t write otherwise, but we really doubt whether the Fed officials really want to see double-digit inflation rates.

However, as we have repeated many times, the current economic crisis is more inflationary that the Great Recession. The recent fast increase in the broad money supply increases the risk of higher inflation in the future. Now, the Fed’s announcement that it will welcome and embrace the rise in inflation, should increase inflation expectations, increasing the demand for gold as an inflation-hedge. Higher inflation expectations would also lower the real interest rates, also supporting the gold prices. Thank you, Mr. Powell!

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter.  Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

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

© 2005-2022 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