Yellen’s December 2017 Press Conference and Gold

By: Arkadiusz_Sieron

The latest FOMC meeting was accompanied by Janet Yellen’s press conference. Let’s analyze the implications of her remarks for the gold market.

Solid Growth, Strong Labor Market, and Subdued Inflation

In her opening remarks, Yellen noted that economic activity has been solid recently, the labor market has been strong, but inflation has been running below the Committee’s 2 percent longer-run objective. She, thus, upgraded the macroeconomic outlook, as she used to speak about a moderate pace of economic growth and about a strengthening, but not necessarily strong labor market. Although inflation continued to run below the Fed’s target, Yellen said that the FOMC members “continue to believe that this year’s surprising softness in inflation primarily reflects transitory developments that are largely unrelated to broader economic conditions.” Hence, her introductory remarks sounded rather hawkish, which is not good news for the gold market.

Was the Fed Really Dovish?

As a reminder, the Fed did not change the expected rate path for 2018 and 2019, but it added one hike in 2020. It means a tighter monetary policy in the medium-term. It also implies that the Fed is more certain about the economic outlook up to 2020. This is why we believe that the latest FOMC meeting was not dovish, contrary to the interpretations of some economists. Why would the Fed change it inflation outlook? It believed all the time that the inflation was subdued in 2017 due to transitory reasons, so it could not upgrade its outlook for inflation – the medium-term outlook already included a moderate increase in inflation over the years. And we would say that the risk for the inflation outlook is more less balanced, as inflation may remain subdued, but it may also increase a bit next year. We would not count on a more dovish Fed in 2018 – one year ago, some analysts also did not believe that the Fed would deliver three hikes, but it did. And it may deliver three hikes next years as well. Even with subdued inflation. Why? The reason is simple – the Fed simply wants to normalize its monetary policy to have more ammunition when the next crisis hits. If we are right and the U.S. central bank will be more hawkish in 2018 (due to stronger economic momentum and personal changes in the FOMC composition), gold will struggle.

Tax Reform, Fed, and Gold

The questions and answers session was a bit nostalgic, as it was the last press conference of Janet Yellen as the Fed Chair. There were even some questions about her future plans and so on. However, the dominant thread was the impact of the tax reform on the U.S. economy and the Fed’s stance. Yellen admitted that the committee had discussed tax policy and that most of the FOMC members had already factored in the prospect of fiscal stimulus into their projections. It means that the Fed expects some impact on economic growth and the unemployment rate, but not on inflation and the projected interest rate path for 2018 and 2019. The implication is that the tax reform will not significantly affect the gold market through the channel of a more hawkish Fed. It is good news for the price of gold. However, “there is considerable uncertainty about the impacts, and that will have to be monitored over time.”

Bitcoin, Fed, and Gold

Interestingly, there were also some questions about cryptocurrencies and the U.S. central bank’s view on them. Yellen replied that “bitcoin at this time plays a very small role in the payment system. It is not a stable source of store value, and it doesn’t constitute legal tender. It is a highly speculative asset, and the Fed doesn't really play any role.” What is important here is that if mainstream journalists ask the Fed Chair about Bitcoin, it may be another sign that the Bitcoin market became overheated. We like the idea of cryptocurrencies, but the current valuations – although still not high in relation to the world’s wealth – look suspicious. If there is correction in that market, gold may catch its breath.

Conclusions

The last press conference of Janet Yellen is behind us. In a sense, we will miss her – not because we agreed with her on monetary policy, but she seemed to be a nice person, who was not afraid to admit her lack of knowledge. It is true that we laughed at her September remarks that subdued inflation was a mystery for the Fed. But the knowledge of own limitations is far better that Bernanke’s arrogance – in 2007, he said that the contagion from sub-prime would not affect the housing market or the economy. Funny, huh?

For us, the general message from the monetary policy statement, economic projection, and Yellen’s press conference is rather hawkish, as the Fed added one more hike in 2010. Sure, it did not upgrade its projected path of interest rates for 2018 and 2019 despite the improved macroeconomic outlook, but it also did not downgrade it in September, despite subdued inflation. Thus, the December FOMC meeting may be bad for the gold market. However, what is important is that the economic impact of tax reform has been already factored in the Fed’s forecast. The impact was smaller than expected, as it did not translate into a faster pace of tightening, gold may catch its breath. Historically speaking, the beginning of the New Year is usually a bullish time for the price of gold. Stay tuned!

Thank you.

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Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

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