The recent Fed’s statement on monetary policy was accompanied by Yellen’s press conference and the FOMC's Summary of Economic Projections. What can we learn from them?
Let’s start with the press conference. The opening statement was quite boring. Yellen reiterated that the labor market had shown further progress so far this year toward the objective of maximum employment, but some cyclical weakness remained, while the low inflation was only transitory. However, she said: “the recent additional decline in oil prices and the further appreciation of the dollar mean that it will take a bit more time for these effects to fully dissipate”. Apparently, the temporariness will last a bit longer than anticipated, as the median inflation projection for 2015 amounts to just 0.4 percent, and the Fed pushed out the time frame for the targeted 2 percent inflation to 2018, from 2017 projected in June.
Yellen’s opening statement was full of contradictions. She claimed that the recent global economic and financial developments had not altered the Fed’s outlook, but also noted: “developments since our July meeting, including the drop in equity prices, the further appreciation of the dollar, and a widening in risk spreads, have tightened overall financial conditions to some extent”. The funny part is the assertion that the Fed’s decision will not hinge on any particular data release or on day to day movements in financial markets, but they just left interest rate unchanged due to a 10 percent correction in the stock market. So the truth is that the recent global economic and financial developments have altered the Fed’s outlook, as many of the Fed participants lowered somewhat their paths for the federal funds rate compared with the projections made in June. The median federal fund rate projection for 2015 declined from 0.6 percent to 0.4 percent and from 1.6 percent to 1.4 percent in 2016.
Central bankers cut their unemployment and GDP growth forecasts for 2016 and 2017 (but they increased their projections for GDP growth this year). This is maybe why only 13 (compared with 15 in July) forecasters expect a first hike this year. What is extremely interesting is that one FOMC member predicted negative interest rates in 2015 and 2016. The European madness is spreading.
The most important part of the question and answer session was when Yellen said that October remained a possibility for an interest rate hike, despite that month’s meeting currently being scheduled with no press briefing. If the Fed were to raise interest rates in October, it would than call a press briefing. A bonus briefing, what a generosity!
Summing up, Yellen’s press conference and the FOMC’s Summary of Economic Projections were even more dovish than the statement on monetary policy. Yellen noted that the transitory character of low inflation had suddenly become less transitory, while the Fed staff lowered their economic projections for the federal funds rate, with one member forecasting even negative interest rates. On the one hand, this is good news for the gold market, as it seems that the Fed is incapable of raising interest rates this year, if at all (by the way, this suggests that the actual underlying economic conditions are far more fragile than the headline data may indicate). On the other hand, if investors sell the rumor and buy the fact, they could anticipate the Fed’s hike in December or January, which would be exerting some downward pressure on the yellow metal.