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LAWRIE WILLIAMS: Gold:  More Fed uncertainty could delay tapering

The gold price suffered again post the most recent Federal Reserve Open Market Committee (FOMC) meeting as the ensuing statements were analysed,  This was despite there being little in the group’s deliberations that changed much in the Fed’s likely schedule for tapering bond purchases and raising the Federal Funds rate.  The gold price seems to continue to be perhaps over-affected by the minutest nuances in statement perception.  But come last Thursday and Friday we saw something of a gold price recovery following the testimony from Treasury Secretary Janet Yellen and Fed Chair Jerome Powell to the U.S. Congress’s House Financial Services Committee.

Powell is reported as stating that the Fed’s employment target, one of the key aims of its policies, is still far away and that inflation is running higher than anticipated and may continue for longer.  This is being taken as a much more ‘dovish’ statement than the immediate post-FOMC meeting one and could suggest a delay in the date of implementation of any tapering of the bond purchasing programme, its likely duration, and would probably lead to a delay in the timing of any interest rate rises to combat inflationary trends.

Yellen's testimony was centred around the importance of Congress increasing the debt ceiling before the U.S. government becomes unable to meet its financial obligations. Hours before a partial government shutdown was scheduled, President Biden did sign a bill that extends some, but not all, government funding until December 3rd, but that only gives partial relief on timing to a much more serious underlying problem.

According to the excellent Gold Monitor newsletter, over the past decade brinkmanship over raising the debt limit has become a tactic by both principal U.S political parties to influence spending goals.   With U.S. midterm elections coming up next year, although not until November, any government policy that is perceived as potentially influencing the nation’s tax burden could become a significant issue. The government, therefore, has to balance the prospects of being held responsible for any subsequent tax rises against the potential economic disaster of a U.S. spending default.  The corresponding blame for such a potentially disastrous event, which could be attributed to either political party depending on how the blame game is spun, thus becomes a major political issue.  With such a finely balanced Senate, which has to give final approval to this process, no specific outcome can yet be considered a certainty.

Thus we have some serious doubts over short term U.S. economic recovery, particularly if there are further delays over raising the debt ceiling.    The longer the arguments over this are ongoing, even if this is settled by the apparent point where the Treasury actually runs out of the money to meet its commitments, probably in a couple of weeks’ time, the economic fallout could still be massive. 

As the Gold Monitor puts it:  “the bottom line is that Chair Powell's statement puts monetary policy back in the lower for longer trend, with the focus on maximum employment, which is positive for gold”.   Certainly, with the gold price’s tendency to move sharply up or down on data releases, any confirmation that tapering and interest rate rises are further away than previously thought could lead to an upwards move, although initial overnight reaction in the markets does not seem to support this premise.  However U.S. and European markets have often recently been at odds in terms of gold price movements, so we will have to wait and see how what tends to be the over-riding American market pans out.

04 Oct 2021 | Categories: US, FOMC

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