The recent Fed’s statement on monetary policy was accompanied not only by the FOMC's Summary of Economic Projections, but also by Yellen’s press conference. What can we learn from her remarks?
Yellen’s Opening Statement
The opening statement was generally boring, as usual, since Yellen basically reiterated what we all already know. However, at the end it started to get interesting, as the Fed Chair decided to explain why the FOMC had not raised the federal funds rate at the meeting, given “the recent pickup in economic growth and continued progress in the labor market have strengthened the case for an increase” and the more balanced risks to the outlook. According to Yellen, the reason was not the lack of confidence in the economy, but the remaining slack in the labor market and the stubbornly low inflation rate.
I hope you see the contradiction. If the Fed officials really had confidence in the U.S. economy, they would not have been afraid of low inflation and labor market slack. If they really had faith in the American economy, they would have been convinced that the labor market would further improve, while inflation would rise. If they really had confidence in the U.S. economy, they would not have said that “it would be sensible given the finding of a bit more running room to wait to see some continued progress evidence that we continue to progress toward our objectives”. Therefore, either the statement does reflect a lack of confidence in the economy – contrary to the Yellen’s assurances – or there is another explanation, such as the Fed simply does not want to rattle the markets, so it cannot raise rates unless the market is on board. Readers themselves have to answer this question.
Yellen’s Q&A
The question and answer session was without fireworks. Several journalists asked about the scandal at Wells Fargo, the role of politics in the Fed’s decision or the election risk. However, the most important part was when Yellen admitted that the Fed creates asset bubbles:
In most advanced nations now, we have highly accommodative policies. And they seem to be necessary for countries to be able to achieve their inflation and employment objectives. And that's characteristic of an environment in which the neutral rate interest rates both here and in advanced countries around the globe appeared to be very low. And that is an environment that, if we do have to live with that for a long time, we have to be aware that it does give rise to a reach for yield as individuals and investors seek to, perhaps, take on risk or lengthen maturities to seek higher yields.
Is that not delightful? The Fed Chair openly says that the zero low interest rate policy pushed may conservative investors who always preferred safe and fixed-income securities into the U.S. stock market.
And it was not the only such remark. When Nancy Marshall-Genzer asked Yellen whether the Fed was worried that “bubbles could form in the economy because of our prolonged low interest rates”, she replied “Yes. Of course, we are worried that bubbles could form in the economy.”
Oh, yes, the Fed is worried – about the bursts, not about the bubbles! The Fed officials do not want to surprise the markets and likely cause a crash, so they cannot raise rates unless the markets believe in such an action.
Conclusions
What does it all mean for the gold market? Well, November is likely off the table, given the market odds at 12 percent. And December is still unclear, since the market chances are fifty-fifty. If the Fed manages to convince the investors and raise interest rates this year, we could see downward pressure in the gold market. On the other hand, if the Fed fails again to telegraph a hike, there may be a delay until 2017. In such a scenario, gold should shine,as the upward potential of the yellow metal has been recently restricted by the perceptions of the imminent Fed rate hikes.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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