Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The May FOMC Meeting Is Over. They Say Every Cloud Has a Silver Lining...

Interest-Rates / US Interest Rates May 03, 2019 - 05:03 PM GMT

By: Arkadiusz_Sieron

Interest-Rates

The May FOMC statement didn’t bring much of a surprise. Fed Chair Powell remained upbeat in his assessment of the U.S. economy while dismissing low inflation as transitory. Gold has initially jumped, only to keep declining later. What has actually happened yesterday, then?

FOMC Statement Acknowledges Lower Inflation

Yesterday, the FOMC published the monetary policy statement from its latest meeting that took place on April 30-May 1. In line with expectations, the US central bank unanimously kept its policy rate unchanged. As previously, the inaction reflected the new patient approach adopted by the Fed in January. So, the federal funds rate remained at the target range of 2.25 to 2.50 percent:


Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.

Did we get anything new? First of all, not all interest rates were unchanged. The Fed set the interest rate paid on required and excess reserve balances at 2.35 percent, or 15 basis points below the top of the target range for the federal funds rate. Officially, the third cut by 5 basis points was intended to foster trading in the federal funds market at rates well within the target range. However, some analysts argue that the move was a direct response to the relatively increasing scarcity of reserves amid the quantitative tightening.

Second, the US central bank acknowledged the recent drop in both overall and core inflation below 2 percent. Indeed, the chart below shows that both the PCEPI and its core version are now around 1.5 percent.

Chart 1: Personal Consumption Expenditures Price Index (green line, in %) and Personal Consumption Expenditures Excluding Food and Energy (red line, in %)

In March, the statement still saw the core inflation near the target. But this time, the FOMC changed its tone:

On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.

The modification can be seen as just reflection of the current data, but it is a dovish change, which suggests that the Fed’s patience may last a while longer. Weaker inflation is not good for gold, which is considered to be an inflation hedge, but a passive US central bank should support it. On the other hand, the Fed characterized economic growth and job gains as solid, an upward revision compared to March meeting.

Apart from these changes, the policy statement was virtually kept the same as it was in March. The Fed is still reluctant to signal the next move, or the direction, despite that the financial markets projecting an interest rate cut. So, the statement should not significantly affect the gold market.

Mr. Powell Spoils the Party

Let’s now move to Mr. Powell’s press conference. His introductory remarks were less dovish than the statement itself. First, Mr. Powell admitted that risks to the outlook have eased (as we have expected them to):

At the start of the year, a number of cross currents presented risks to the outlook, including weak global growth, particularly in China and Europe; the possibility of a disruptive Brexit; and uncertainty around unresolved trade negotiations. While concerns remain in all of these areas, it appears that risks have moderated somewhat. Global financial conditions have eased, supported in many places around the world by an accommodative shift in monetary policy, and in some cases fiscal policy. Recent data from China and Europe show some improvement, and the prospect of a disorderly Brexit has been pushed off for now. Further, there are reports of progress in the trade talks between the United States and China.

This is another hint that the current inaction is not a change in the stance, but a pause in the unfinished tightening cycle. The implications of diminished risks would not help safe haven assets such as gold.

Second, Mr. Powell said that muted inflationary pressure might be temporary, which make the interest rate cut even less probable:

We suspect that some transitory factors may be at work. Thus, our baseline view remains that, with a strong job market and continued growth, inflation will return to 2 percent over time and then be roughly symmetric around our longer-term objective.

Indeed, Mr. Powell admitted that the FOMC doesn’t see a strong case for a rate move in either direction.

Implication for Gold

The statement was little changed. However, the wording seems dovish. This is why gold pumped initially. But Powell sounded more hawkish during the press conference – and more hawkish than expected. So the price of the yellow metal dropped eventually, as the chart below shows.

Chart 2: Gold prices from April 30 to May 2, 2019.


This is because Mr. Powell sounded optimistic on the economy and dismissed concerns about low inflation, saying that this is a transitory development. And he dashed hopes of a near-term rate cut, saying that the US central bank does not see a strong case for a rate move either way. So, investors adjusted their expectations: the market odds of the interest rate cut by December 2019 declined from above 60 to around 50 percent.

This is exactly what we expected – and we warned investors that the markets seem to be too pessimistic. In the Gold News Monitor published on April 11, we wrote that “there is little in the minutes that warrants a rate cut by December. If the market expectations adjust, gold may struggle.” We reiterated our view on April 23:

The FOMC may pause for a few months, but given the strong labor market and frothy valuations of certain assets, it shouldn’t cut interest rates. Such a move would unsettle markets, which closely follow how the Fed sees the economy, while leaving the US central bank with less ammunition when the next economic crisis hits the economy. Therefore, when we get more positive economic reports, the market participants could change their views. This is bad news for the gold bulls, as the revised expectations of the future path of the federal funds rate would make gold struggle.

And this is what is happening. Gold struggled yesterday. Looking at the fundamentals only, a downward move shouldn’t surprise us given the current level of market expectations. Especially, if the upcoming data paints an upbeat picture of the economy. You have been warned!

Thank you.

If you enjoyed the above analysis and would you like to know more about the link between the U.S. economy and the gold market, we invite you to read the August 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