Yesterday, the FOMC members leaved interest rates unchanged. What does it mean for the gold market?
As it was expected, the Fed officials kept interest rates unchanged at between 0.25 and 0.50 percent once again. The U.S. central bank believes that the near-term risks to the economic outlook appear roughly balanced, while the inflation rate will rise and the labor market will strengthen somewhat further. In spite of these facts, the Fed decided to maintain the target rate for the federal funds rate at 0.25 to 0.50 percent. It clearly shows that the U.S. central bank is a hostage to the financial markets, which did not expect a hike in November, just one week before the presidential election.
The most important part of the statement is as follows:
The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives.
Although the statement did not include the phrase “next meeting”, it signals that the Fed is considering a hike in December. Therefore, the market odds of a Fed hike in the last month of 2016 increased from 68.4 to 71.5 percent.
The key takeaway is that the Fed chickened out again, mainly because of the presidential election only six days later. The U.S. central bank’s inaction seems to be dovish as there was one less voice of dissent from the statement than for the prior decision in September (Boston Fed President Eric Rosengren changed his vote), but the committee added that near-term risks to the economy are roughly balanced, while the expected path of future interest rates steepened.
On balance, the Fed meeting was a non-event, but its tone was hawkish enough to support the view of a move at the end of the year. This is perhaps why gold moved upward initially, but later come off its highs of the day. Although the rise in the market odds of a Fed hike in December should theoretically be negative for the precious metals market, it does not have to be such in practice.
Why? First, the hike in December is widely expected and it should generally be already priced in. Second, gold is now driven by the uncertainty over the outcome of the U.S. presidential election as the narrowing polls between Clinton and Trump have increased the safe-haven demand for the shiny metal.
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.