Powell Testimony Propels Gold Above $1,400 - the Countdown to July’s FOMC Is On

By: Arkadiusz_Sieron

Hot Wednesday is behind us. We had both the Powell’s testimony to the Congress and the released minutes from the latest FOMC meeting. The biggest yesterday’s winner is clearly gold. If you would like to know why – and what situation the yellow metal is in currently – we invite you to read our today’s article!

Powell Fails to Push Back Against Market Expectations of Rate Cut in July

What a day! Gold is back above $1,400, as one can see in the chart below. What happened exactly?

Chart 1: Gold prices (London P.M. Fix, in $) in 2019.

First of all, Powell testified yesterday before the Committee on Financial Services, U.S. House of Representatives. What did he say? In his prepared remarks, Powell noted that the economy performed reasonably well over the first half of 2019, while the labor market remained healthy. The Fed’s basic outlook is still for economic growth to remain solid, labor markets to stay strong, and inflation to move back up over time to the Committee’s 2 percent objective.

But it were not these comments that sent gold above $1,400. Powell also stressed that

uncertainties about the outlook have increased in recent months. In particular, economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit. And there is a risk that weak inflation will be even more persistent than we currently anticipate.

Instead of focusing on hard data, Powell emphasized crosscurrents. Apparently, the recent trade truce between China and the U.S. did not impress him. He also downplayed a rebound in consumer spending during spring and a surge in nonfarm payrolls in June that eased worries after poor employment in May. Despite all the positive economic reports published recently, Powell basically said that nothing has improved since the June FOMC meeting:

Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.

In Tuesday’s Gold News Monitor, we wrote that “because of the Wall Street's addiction to loose monetary policy, the FOMC could be forced to cut the federal funds rate at its next meeting.” Powell’s testimony confirmed our assessment. Although the recent U.S. economic data does not justify the move, Powell did nothing to change the market expectations and discourage traders from anticipating an interest-rate cut later this month. But he did encourage the gold bulls to enter the trading floor, that’s for sure!

FOMC Minutes Present Several Reasons for Interest Rate Cut

Wednesday was a big day. Apart from Powell’s testimony, later in the day the minutes of the latest FOMC meeting hit the tape. Just as Powell’s earlier comments, the minutes were dovish.

This is because participants generally agreed that “downside risks to the outlook for economic activity had risen materially since their May meeting” and that “the economy appeared to have lost some momentum”. Consequently, many Committee members indicated that “the case for somewhat more accommodative policy had strengthened”.

And now a long but key passage, which clearly shows that the Fed is prepared to cut interest rates this month:

Participants widely noted that the global developments that led to the heightened uncertainties about the economic outlook were quite recent. Many judged additional monetary policy accommodation would be warranted in the near term should these recent developments prove to be sustained and continue to weigh on the economic outlook. Several others noted that additional monetary policy accommodation could well be appropriate if incoming information showed further deterioration in the outlook. Participants stated a variety of reasons that would call for a lower path of the federal funds rate. Several participants noted that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective. Some participants also noted that the continued shortfall in inflation risked a softening of inflation expectations that could slow the sustained return of inflation to the Committee's 2 percent objective. Several participants pointed out that they had revised down their estimates of the longer-run normal rate of unemployment and, as a result, saw a smaller upward contribution to inflation pressures from tight resource utilization than they had earlier. A few participants were concerned that inflation expectations had already moved below levels consistent with the Committee's symmetric 2 percent objective and that it was important to provide additional accommodation in the near term to bolster inflation expectations. A few participants judged that allowing inflation to run above 2 percent for some time could help strengthen the credibility of the Committee's commitment to its symmetric 2 percent inflation objective.

The whole litany of reasons! Everyone can pick up a justification to suit their taste! Let’s make the long story short. Rather than weaker U.S. data, the main motivations for the upcoming interest rate cut is subdued inflationary pressure and an insurance against downside risks.

Implications for Gold

Powell had probably the last chance to push back against the market expectations of an interest rate cut this month. Maybe he knew that it would be pointless, given the dovish minutes of the latest FOMC minutes. As the Fed Chair beat expectations on a dovish side, gold prices rose to their highest in over a week.

But what’s next for the yellow metal? Well, gold has been quite volatile recently, moving around $1,400. While it takes a lot more factors to consider and charts to interpret in order to make a gold price prediction, isolating the FOMC run-up periods shows a tendency for gold prices to rise heading into the FOMC – and that applies also to the meeting at the end of this month.

The more distant future is not all clear cut, yet gold finds itself in a more positive environment fundamentally, translating into fewer headwinds. The interest rate cut would work to ease upward pressure on the U.S. dollar, stimulating demand for gold. Moreover, the Fed’s move should add to the recession fears. If everything was rosy, the U.S. central bank would not reduce interest rates. Such worries should drive investors to safe havens such as gold.

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Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

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