LAWRIE WILLIAMS: Fed up with the Fed – No changes - yet
With the U.S. being the principal driver of movement, the gold price tends to move up or down based on the nuances that are assessed to arise from statements following the U.S. Fed’s regular FOMC meetings. The latest such meeting, which took place on Tuesday and Wednesday this week, has been no exception. Significant changes forthcoming at the meetings themselves are rare so analysts have become adept at ‘reading between the lines’ of statements following these meetings, and in particular to those made by Fed Chair, Jerome Powell.
The analysts and commentators are looking for the slightest hint of any impending change in the Fed’s interest rate policy, and corresponding worries about inflation, both of which can have a significant effect on gold and silver prices, and the dollar index. The Fed’s and Powell’s views on the likely path of the U.S. economy as the nation is seen to be recovering from the Covid-19 virus pandemic, also comes under intense scrutiny, as likely colouring medium to long term policy decisions. In the latest case analysts were particularly looking for any evidence that the Fed might start ‘tapering’ its bond purchases perhaps as soon as later this year.
It is seldom worth trying to second guess the FOMC meeting outcomes, so one needs to wait and see what arises in the usually mostly non-committal post meeting statements and base one’s assessment accordingly. On the face of things the Fed is not, at least in the short term, open to diverging from its current ultra-low interest rate policy despite a potential ris in its current inflation assessment. So far Fed chair, Powell, has deemed any above-target inflation rises as being transitory.
And so it was again this time around. The Fed did not signify any interest rate rise in the foreseeable future and kicked the can down the road as far as any serious discussion on possible tapering was concerned. However there did seem to be some recognition in post-meeting statements that the situation could change as the economy continues to recover, and if anything beyond transitory inflation rises begin to be seen. Some economists reckon worrying inflation trends may already be happening.
The Fed statement that it is “prepared to adjust the stance of monetary policy as appropriate if risks emerge” is seen by some as being beyond normal non-committal Fed-speak. Thus this is being taken in some circles as being an indicator that rate rises and tapering may come about sooner than earlier Fed statements would have us believe. The next FOMC meeting takes place in mid-June, and perhaps further clarity will be forthcoming by then.
In a post-meeting Q&A session, Powell made it clear that the Fed would be unlikely to consider tapering, nor raise interest rates, until the U.S. reaches its 3.5% unemployment target and the annual inflation rate exceeds the current target of 2% for an extended period of time.
The basically unchanged Fed position for now on inflation and interest rates had the dollar index coming off a few points and precious metals breathing something of a sigh of relief with all rising on consideration of the Fed statements, although reaction in European trading this morning has been somewhat mixed so far U.S. equities fell, but not significantly. The proposed $4 trillion Biden infrastructure/ tax/family programme, which was spelled out by the U.S. President also yesterday, probably helped the markets too, mitigating any potential falls arising from the Fed statement.
We would anticipate precious metals marking time for a few days at, or around, current levels before gold takes another run at the $1,800 level. If it breaks through decisively, which is by no means certain, it will predictably drag silver up with it, but the pgms’ price pattern will largely be directed by perceptions of economic recovery in Europe and North America. Both platinum and palladium are seen as being in a serious potential supply-deficit situation, particularly if the light vehicle market continues to pick up and could thus trade higher into the mid-year.