Wednesday, the minutes of the Federal Reserve's June meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?
The recent minutes generally contained no new information or clues to move the markets. Therefore, they were a non-event for the gold market. However, we believe that the Fed officials turned out to be slightly more dovish. They noted that although growth in economic activity appeared to have picked up, the pace of improvement in the labor market had slowed.
Some FOMC members pointed out that “the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity”, while others noticed “that with labor market conditions at or near those consistent with maximum employment, it would be reasonable to anticipate that gains in payroll employment would soon moderate from the pace seen over the past few years”.
The truth is that the July hike is off the table, since “almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market”.
Hence, they “judged that they would need to accumulate additional information on the labor market, production, and spending to help clarify how the economy was evolving in order to evaluate whether the stance of monetary policy should be adjusted.”
The second reason why the Fed is unlikely to raise interest rates this month is the Brexit vote. The FOMC members were worried that the referendum could generate “financial market turbulence that could adversely affect domestic economic performance”.
Thus, they believed that it would be prudent to wait and assess the consequences of the vote for global financial market conditions and the U.S. economic outlook. Probably the most important paragraph of the recent minutes is below:
“Members generally agreed that, before assessing whether another step in removing monetary accommodation was warranted, it was prudent to wait for additional data regarding labor market conditions as well as information that would allow them to assess the consequences of the U.K. vote for global financial conditions and the U.S. economic outlook.”
After the release of the minutes, the expected path of the federal funds rate for the medium term implied by market quotes declined. Markets do not currently expect any hike at least until June 2017 (there are no Fed Fund futures beyond this time). Actually, investors assess that there is a 4.8-percent chance of a rate cut this month, a rise from 3.6 percent the day before.
The key takeaway is that the June FOMC minutes were slightly dovish, but did not trigger any important reactions in the gold market. However, the flatter expected path of the federal funds rate and a decline in global risk sentiment should be bullish for the shiny metal.
Indeed, gold continued its rally yesterday and prices ended the U.S. day session higher, hitting a 27-month high. Investors should be careful, though, as the Fed could start recalibrating market expectations of the Fed rate rises during its July meeting.
This would put downward pressure on gold, which has rallied recently not only on Brexit fears, but also on the fall in the expected path of the federal funds rate. A lot depends on tomorrow’s non-farm payrolls and on the further developments of the Brexit crisis.
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.