The US employment rate is running at a near what is called full employment. It’s now 4.3% and if the Fed is right, could go to 4%. The Eurozone’s unemployment is running at decade old numbers, under double digits there at 9.3%, yet wage inflation there is also missing.

When you have little inflation along with historically low interest rates, investors naturally seek out the best returns they can get their hands on, which in large part explains the stock

market rally that’s been going on for 9 or so years now. Keep in mind that this was part of the Fed’s goal, one they’ve accomplished. The Fed has also said its concerned about stock market valuations, so it doesn’t seem overly concerned if stocks sink back a bit on interest rate hikes.

I don’t see the stock market rally ending by the Fed’s move to raise interest rates a quarter point as they did today. Yes there’s the “dots” the Fed’s talk about which portrays when and how many rate hikes Fed Governors expect down the road, but they are not in cement. They are but a guideline as to what they’d like to do, not what they have to do.

The brings us back to the Fed’s dual mandate. It is to maintain an economy as close to full employment as it can and to control inflation. Given the current spate of poor economic numbers, my take the June rate hike is this. The Fed sees inflation coming soon, or is willing to err on the side of coming inflation in its effort to get us to think inflation is just below the surface and they want to be ahead of the curve. If in the next few months, the economic data doesn’t improve you can forget about a September rate hike but that doesn’t mean a December one is off the table. Look for more Fed talk about shrinking its balance sheet by not reinvesting proceeds of notes as they mature. This poses a problem given Ms. Yellen’s term expires at the end of January and President Trump has not announced who will be the next Fed Chair. If it’s not Ms. Yellen, she might decide to leave the project of shrinking the balance sheet alone, leaving it to her predecessor.

When the shrinking of the balance sheet begins, it will have the dual impact of removing a major buyer of notes, the US, and in turn might cause rates to move lower unless another large buyer or buyers step in to replace the amount the US rolls over each month. China comes to mind as a potential buyer given that its foreign reserves are once again growing and the rift they had with President Trump seems to have been smoothed over.

FOMC Decision and Highlights…June 14^th 2017 Meeting

• Fed Funds interest rate hiked by 25 bps to 1.00% to 1.25% range
• Fed has begun setting out plan to shrink balance sheet
• monitoring inflation developments closely
• near term economic risks are roughly balanced
• labor market continues to strengthen
• household spending picking up in recent months
• business investment continues to expand
• votes came in at 8 for and 1 against today's rate action
• core inflation has inched lower, which is seen as better barometer of future inflation
• said core inflation will move up in the next couple years on better employment
• real GDP is 2.2% this year inching down to 1.9% by 2019
• inflation projection of 1.6% this year then rising to 1.8% next and following years
• continue to expect to raise interest rates gradually
• projected path of Fed Funds rate by members are largely unchanged from March outlooks
• balance sheet reduction plans does not affect Fed's future interest rate policy use
• balance sheet policy tools should be part of future toolkit for the central bank
• after 5 years of undershooting inflation goal, the FOMC is still committed to that goal
• dismisses low inflation on idiosyncratic elements
• Phillips Curve remains flat
• wage growth remains low
• no sign of upward pressure on inflation
• current Fed policy shows no evidence of changed investor or consumer spending

Chart Action

Those who follow me know I post Daily Videos on YouTube that can be watched by all. It requires no User ID or Password. In it I cover the daily charts of gold, silver, copper, platinum and palladium. Just go to YouTube and type in Ira Epstein, you’ll find me.

In this report I want to focus on longer term charts, specifically the monthly chart. Yes, its means you give the market more leeway, but this type of chart is about the bigger picture. As such it also stops you from being swayed by the day to day movements of gold, which can be volatile.

Monthly Chart with Uptrend and Downtrend Lines

What’s just taken place on the above chart was the challenging of the long-term downtrend line. Prices did so in 2016, and again in April of this year. Each time, there’s been no follow through, which is causing the current Triangle Chart Pattern.