Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Will Fed’s Dovish Shift Support Gold?

Commodities / Gold & Silver 2019 Jan 31, 2019 - 05:29 PM GMT

By: Arkadiusz_Sieron

Commodities

Big win for the doves! And for gold, as it jumped above $1,320 amid the soft FOMC statement. What’s next?

Committee Will Be Patient

Yesterday, the FOMC published the monetary policy statement from its latest meeting that took place on January 29-30th. In line with the expectations, the US central bank unanimously kept the federal funds rate unchanged at the target range of 2.25 to 2.50 percent (the Fed also kept other interest rates unchanged and reaffirmed its “Statement of Longer-Run Goals and Monetary Policy Strategy”):

In support of these goals [maximum unemployment and price stability], the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.


The pause in hiking was not the only change in the statement from the December version. First, the assessment of the economic activity was revised downward a bit. It was described as rising at a ‘solid’ rate, while one month earlier it was a ‘strong’ rate. The next two changes are much more important. The FOMC dropped its pledge of “further gradual” rate hikes. In December statement, one could find the following sentence:

The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.

Now, it’s gone. Instead, the FOMC included a sentence in which it announced being patient:

In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
That decisions seem to be incomprehensible given “generally strong U.S. macroeconomic performance”, as Powell put it. However, the problem is that the Fed has seen some cross-currents and conflicting signals about the outlook, mainly the slowdown in economic growth in China and Europe, unresolved trade tensions or uncertainty about Brexit. Hence, the growing evidence of cross-currents pushed the Fed to become more patient awaiting greater clarity.

The wait-and-see approach is not only about the risk-management. Another justification is the weakened case for raising the interest rates due to the lack of inflationary pressures and receded risks of financial imbalances:

In addition, the case for raising rates has weakened somewhat. The traditional case for rate increases is to protect the economy from risks that arise when rates are too low for too long, particularly the risk of too-high inflation. Over the past few months, that risk appears to have diminished.

And What About Balance Sheet Normalization?

The Fed also released a statement on the balance sheet normalization. It indicated it’s willingness to adjust the size of its balance-sheet runoff, although it was supposed to work on an autopilot:

The Committee is prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.

Moreover, the Fed announced that it would continue to use administered rates to control the policy rate, with an ample supply of reserves. It means that, as we explained it to our Readers a long time ago, the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet, than in previous estimates.

Implications for Gold

To sum up, the FOMC was dovish both on the interest rate policy and the balance sheet policy. Although Powell denied that there is a “Powell put”, he said everything what the markets wanted to hear. Or, even more, as the FOMC statements and Chair’s press conference were actually more dovish than expected. In consequence, the stock markets went up, while the U.S. dollar declined against the euro or the Japanese yen (see the chart below).

Chart 1: USD/JPY exchange rate from January 29 to January 31, 2019.


So, the price of gold jumped above $1,300 in the response to the dovish signals from the Fed, as one can see in the chart below.

Chart 2: Gold prices from January 29 to January 31, 2019.

Will it be just a temporary spike or will we see a continuation of the rally? Well, it’s never easy to say, but the addition to the FOMC statement the part about being patient implies that the Fed will not hike interest rates in the next few months at least. It means that the greenback will not be supported by the Fed’s tightening. With weaker US dollar, gold has more room to go up.

To be clear: the interest rate hike are still possible in 2019, when the uncertainty clears a bit and all these cross-currents calm. However, a big dovish shift in the Fed’s stance should support the yellow metal for some time (and unless investors, now with Powell’s put at hand, shift into riskier assets).

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in