Advertise | Bookmark | Contact Us | E-Mail List |  | Update Page | UraniumSeek.com 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

Gold Seeker Closing Report: Gold and Silver Gain with Stocks and Dollar
By: Chris Mullen, Gold Seeker Report

Jack Chan's Question: Is This an Exhaustion Gap or a Breakaway Gap?
By: Jack Chan

Gold: Tactics For The Price Sale
By: Stewart Thomson

A Depressed Economy And A Silver Boom
By: Hubert Moolman

Gold Stocks are not too Oversold yet
By: Jordan Roy-Byrne CMT, MFTA

JULY - SII UPDATE; Mid-Year 2018
By: Gordon T Long

Bullish Data For COMEX Gold
By: Craig Hemke

Weekend Report…Impulse Moves in the Currencies
By: Rambus

Has Inflation Peaked?
By: Arkadiusz Sieron

Taiga Completes Fieldwork at Orchid Project, Provides Update on Ongoing Exploration at the Fisher Project
By: Taiga Gold Corp.

 
Search

GoldSeek Web

 
Central banks paralysed at the zero bound


 -- Published: Friday, 27 March 2015 | Print  | Disqus 

By Alasdair Macleod

Though the Fed would deny it, it is clear from the minutes of the last Federal Open Market Committee (FOMC) meeting that a rise in interest rates has been put off indefinitely. The subsequent rally in the price of gold and the sudden fall in the dollar tend to confirm this conclusion.

The Fed Funds Rate, which is the interest rate the Fed targets to set all other rates, has now been less than 0.25% for six and a quarter years, gradually declining from roughly 0.15% to about 0.10% today. It was set at a target range of between zero and 0.25% in December 2008.

Effective Fed Funds Rate

According to the Policy Normalisation Principles and Plans issued last September, the FOMC will raise its target range for the Fed Funds Rate "primarily by adjusting the interest rate it pays on excess reserve balances" when the Fed normalises interest rates, "using reverse repurchase agreements to take money out of circulation to the degree necessary". The Fed also intends to reduce its holdings of securities and contract its balance sheet in the longer run.

If normalisation is the result of economic recovery we will be familiar with the playbook. Demand for money in the economy picks up, and instead of pyramiding bank credit on reserves held at the Fed, the Fed feeds back the excess reserves to the banks by selling government securities into the markets. The bear market in government bonds should be manageable because of underlying pension and insurance company demand coupled with a diminishing budget deficit. This is the long-understood theory behind withdrawing from deficit financing.

The reality has been very different as we all know. The Fed has to face the possibility that, for whatever reason, highly suppressed interest rates are not working, and an escape from the zero interest rate bound without economic recovery may have to be contemplated.

However, if the Fed raises the Fed Funds Rate in the absence of genuine economic recovery, there will be little or no expansion of bank credit to offset, and commercial banks will want to dump their Treasuries, not buy more from the Fed. There would be no offsets to cushion the unwinding of long bond positions. In other words the effect of even a small rise in the Fed Funds Rate could develop into a self-feeding rise in bond yields and substantial losses for the banks.

This is the context within which we should consider the Fed's decision to back off from raising the Fed Funds Rate mid-year. It leads to the conclusion that if zero interest rates haven't worked for six and a quarter years, monetary policy itself is in a cul-de-sac with no space to turn. And when we look at Japan and the Eurozone we see similar disappointments over the effectiveness of monetary policy.

Markets are unlikely to wait until the escape from the zero bound is put to the test. Before the investing public becomes aware of the full ramifications of the problem, more prescient bankers and fund managers will reposition their bond holdings, which brings us to gold.

Those of us that follow this market closely know that for the last three years at least Asian demand has led to large shifts of bullion from western capital markets towards Asia. The behaviour of the markets in London and New York already indicate that shortages of physical bullion are a delicate problem, and this is before markets wake up to the growing likelihood that the Fed cannot afford to see interest rates rise.

If interest rates cannot rise, then the dollar itself is ultimately exposed to loss of confidence in the foreign exchanges. The dawning realisation that after recent strength, the dollar is vulnerable after all can be expected to be reflected in a positive sentiment towards gold, which once under way could drive the price up dramatically due to the lack of available bullion.


The views and opinions expressed in the article are those of the author and do not necessarily reflect those of GoldMoney, unless expressly stated. Please note that neither GoldMoney nor any of its representatives provide financial, legal, tax, investment or other advice. Such advice should be sought form an independent regulated person or body who is suitably qualified to do so. Any information provided in this article is provided solely as general market commentary and does not constitute advice. GoldMoney will not accept liability for any loss or damage, which may arise directly or indirectly from your use of or reliance on such information.


| Digg This Article
 -- Published: Friday, 27 March 2015 | E-Mail  | Print  | Source: GoldSeek.com

comments powered by Disqus



 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2018



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer

The views contained here may not represent the views of GoldSeek.com, its affiliates or advertisers. GoldSeek.com makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, is strictly prohibited. In no event shall GoldSeek.com or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.