With December’s Fed meeting behind us, the fresh economic projections look bad for the yellow metal. However, the monetary policy statement and Powell’s press conference could support gold prices.
In general, the statement was little changed, however, there was one important adjustment: the US central bank offered something similar to the outcomes-based guidance. I’m referring here to the fact that the Fed wrote that it would continue to buy at least $120 billion of bonds each month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. Previously, the statement noted that the US central bank would buy assets to “sustain smooth market functioning and help foster accommodative financial conditions.”
In other words, the Fed now uses forward guidance not only for the federal funds rate, but also for its balance sheet. The US central bank ties its interest-rate and balance sheet policies towards its goals of reaching full employment and inflation at two percent, meaning that the Fed will not cease buying assets unless it believes that the economy has fully recovered. Wall Street can sleep well!
All this means that the December statement could be read as slightly dovish. However, it could also be a bit disappointing for the more radical doves counting on more accommodative actions. It also means that the Fed acted more hawkish than expected, which is clearly bad news for gold bulls.
December Economic Projections and Gold
On Wednesday, the FOMC issued not only the statement of its monetary policy, but also its fresh economic projections. The COVID-19-related economic crisis is now expected to be weaker than previously thought, as the GDP growth is projected to be higher this and next year, while the unemployment rate is to be lower, as the table below shows.
To be more precise, the FOMC expects that the GDP will decrease only 2.4 percent this year, while increasing 4.2 percent in 2021 and 3.2 percent in 2022, compared to a negative -3.7, positive 4 percent and positive 3 percent expected in September.
The unemployment rate is forecasted to be “only” 6.7 percent in 2020 and 5 percent in 2021, compared to 7.6 and 5.5 percent seen in September. The fact that the recovery has progressed more quickly than expected by the central banks is another piece of bad news for gold prices. The consolation for goldbugs can be the fact that overall economic activity remains well below the pre-pandemic level.
When it comes to PCE inflation, the FOMC now sees slightly higher inflation in 2021 and 2022 compared to September (1.8 and 1.9 percent versus 1.7 and 1.8 percent). However, the FOMC still projects that inflation will stay below its target until 2023, which will provide an excellent excuse for the continuation of its dovish monetary policy of lower rates for longer, thus supporting gold prices.
Indeed, despite the more upbeat economic outlook – which is bad news for gold prices, when analyzed separately – the Fed sees that interest rates will remain unchanged, i.e., near zero, at least until the end of 2023 (however, one more Committee member thinks that hiking interest rates in 2023 is appropriate). From the fundamental point of view, this is the only positive news for gold, which shines under ZIRP and negative real interest rates.
Implications for Gold
What does December’s FOMC meeting imply for gold? Well, the price of the yellow metal declined initially, only to rebound later during Powel’s press conference. This is because the Fed Chair sounded dovish and emphasized that the US central bank would continue buying assets until “the job is well and truly done.”
Moreover, Powell promised that that Fed would say well in advance before starting to slow down the pace of bonds purchases – and that we are far away from this moment – to avoid the replay of the 2013 taper tantrum.
Summing up, the fresh dot chart offers a more optimistic economic outlook, which is bad for gold. The statement could disappoint some doves, but it can also be interpreted as quite dovish, as the Fed basically promised to increase asset purchases if economic recovery slows. Powell’s press conference reaffirms this interpretation, as the Fed Chair sounded dovish. All this means that although the Fed didn’t follow in the ECB’s footsteps, it remains highly accommodative. Such a monetary policy should keep the downward pressure on the real interest rates, thereby supporting gold prices. Actually, in recent years, the price of gold usually started to rise after the FOMC December meeting – but we have yet to see whether this pattern will replay again.
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Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.
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 Gold & Silver Trading Alerts.