-- Published: Tuesday, 11 September 2018 | Print | Disqus
No, we are not in Wyoming. But we have carefully followed the Fed’s key conference in Jackson Hole. What does the recent central bankers’ meeting in Wyoming imply for the gold market?
Why Powell Was Dovish in Jackson Hole
The Fed’s annual Jackson Hole Symposium, entitled this year “Changing Market Structure and Implications for Monetary Policy”, sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, is over. But we can feel its consequences well beyond it. So let’s analyze the latest gathering, starting with the Powell’s speech entitled “Monetary Policy in a Changing Economy” (we will come back to the symposium in the future editions of the Gold News Monitor).
Financial markets considered the Fed Chair’s remarks as dovish. The bond yields declined, while the stock market hit record highs. The reason is that Powell dismissed the risk of overheating. Although inflation has finally reached the Fed’s target, the Fed Chair is not afraid that it could get out of control:
While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating.
Actually, Powell acknowledged that inflation is not the best indicator of economic imbalances. Both the dot-com and the housing bubbles emerged despite the low inflation rate:
Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses.
Hence, if there is no risk of inflation and the Fed should look beyond the data on consumer prices, the Fed may be less hawkish than it was expected. With the more dovish central bank, gold may catch its breath.
Why Powell Wasn’t Dovish in Jackson Hole
However, we believe that Powell wasn’t as dovish at Jackson Hole as many analysts believe. First of all, he reaffirmed his attachment to the concept of gradual tightening. Actually, Powell argued that the gradually raising interest rates is the best approach to navigate the Fed between moving too fast (risking the abrupt end of the economic expansion) and moving too slowly (risking a destabilizing overheating): “I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks.” In other words, be prepared for more interest rate hikes, as the Fed is determined to approach gradually closer to the FOMC’s rough assessment of neutral policy stance:
As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.
Moreover, Powell referred a few times to the new paper by a group of top Fed economists who argued that “because monetary policy acts with a lag, waiting for inflation to materialize before reacting is undesirable”. It suggests that the Fed will stick to its policy of gradual tightening even without accelerating inflation on the radar. This is clearly bad news for gold, which shines most during periods of high inflation and low interest rates. But we could have the opposite macroeconomic situation!
Implications for Gold
What does it all mean for the gold market? Well, we expect more of the same for the gold market. Actually, under Bernanke and Yellen, the market has become accustomed to a sluggish Fed which is widely behind the curve. But all changed with Powell – and now investors underprice versus the Fed expectations. The implication is that we could see some hawkish ‘surprises’ in the near future, which could be negative for the gold market. On the other hand, after a few increases since 2015, there is limited room for further upward moves. When the pace of rate hikes slows down, probably around mid-2019 (or, actually, when such expectations start to be common), the yellow metal should catch its breath.
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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.
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-- Published: Tuesday, 11 September 2018 | E-Mail | Print | Source: GoldSeek.com