Yesterday, the Federal Reserve released their most recent monetary policy statement. How can it affect the financial markets and the gold price?
As expected, the central bank’s officials reaffirmed the current 0 to ¼ percent target range for the federal funds rate. In line with forecasts, the tone of the FOMC statement was slightly more upbeat than in April, as the Fed’s officials stated: “economic activity has been expanding moderately after having changed little during the first quarter”. It was definitely an improvement from the April meeting, when the FOMC members said: “economic growth slowed during the winter months, in part reflecting transitory factors”.
However, the Fed downgraded its economic projections for this year, as expected. The central tendency of the growth projections for 2015 is now 1.8 to 2.0 percent, down a little more than half a percentage point from the March projections, while the central tendency for the unemployment rate now stands at 5.2 to 5.3 percent, up from 5.0 to 5.2 in March. It is the second time since December that the central bank has downgraded its GDP forecast for this year. Consequently, the FOMC members lowered somewhat their paths for the federal funds rate. The median projected rates in 2016 and 2017 were cut by a quarter percentage point, while the median rate for the end of this year remained unchanged between 0.5 and 0.75 percent. But the range of projections was much narrower in June. In March, four FOMC members expected that the Fed interest rate would be between 1 and 1.75 percent at the end of 2015, while in June no one projected the interest rate to be higher than 1 percent in 2015.
The median dot at 0.625 percent is consistent with a September hike. Actually, it still implies two rate hikes this year, but in June an increased number of policy makers advocated only one move this year. What is important is that the pace of tightening will be gradual and the central bank will not “lift-off” interest rates, but it will be instead “crawling”, according to Fed vice-chairman Stanley Fischer. It is very good news for the gold investors, as the more gradual the monetary tightening is, the better for the gold prices. This is perhaps why (together with concerns about Grexit) gold rose yesterday 0.3 percent and why it extended gains today.
Summing up, the FOMC members were slightly more optimistic in their recent monetary policy statement, but they downgraded their economic projections and interest rate expectations. On balance, the statement was more dovish than expected, since there were no clues for a hike in September. The statement is rather positive for the gold prices, as the path of rate hikes will be probably less steep than anticipated.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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