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arkadiusz-sieron

Fed Surprisingly Hawkish in October

October 29, 2015, 8:53 AM Arkadiusz Sieroń , PhD

Yesterday, the Fed opened doors for an interest rate hike in December. What does it imply for the gold market?

The Federal Reserve kept interest rates close to zero at its October meeting, but the released statement was generally hawkish. Why? First, the U.S. central bankers changed their language and pointed to a possible rate increase at the next meeting, the first time since 1999.

“In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.”

Previously, this part of the statement did not have any precise time element. Second, the Fed removed references to global developments that could restrain growth. The policymakers were also optimistic about economic growth, as they said that the economy was expanding “at a moderate pace” and “household spending and business fixed investment has been increasing at solid rates in recent months.”

This is quite a surprising opinion, given the recent weak economic data, like retail sales or durable goods orders. We are also not convinced that the global economy stabilized in the last month and China is no longer any concern. So why did the Fed become so hawkish? The reason may be that the Fed simply needs to raise interest rates in December – regardless of economic conditions – to show that it can, and to maintain its credibility. Another explanation is that the Fed essentially plays with investors. It cannot raise interest rate (to a normal level), so as not to pop the financial bubble. However, the Fed cannot break people’s expectations that rates will rise at some point - if savers and investors expected that the rates would remain at the zero level forever, they would fly out of the credit market. Thus, the Fed has to send hawkish signals from time to time.

Gold prices fell sharply after the Fed’s press release, to its lowest level in two weeks. If investors believe that interest rate hike this year is still on the table, the price of gold may decline. As we wrote last week, “the gold trade is generally about the Fed, [so] any stronger hawkish signals from the U.S. central bank could change the sentiment in the gold market again”.

Summing up, the Fed was surprisingly hawkish at its October meeting. U.S. central bankers downgraded concerns about global developments and opened doors for an interest rate in December. We are a bit skeptical whether the Fed is really going to hike this year, but some baby step is possible. The October statement is not good news for the gold market, as it may restore the negative sentiment toward the yellow metal.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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