The Fed released the minutes from its last meeting yesterday. What can we learn from the new light they shine on the U.S. monetary policy? How will it affect the gold market?
Minutes Show That FOMC Members Are More Worried Now
The minutes from the Sep FOMC meeting show that the Fed is more worried about the economy. The Committee members noted that downside risks had become more pronounced due to the increased trade conflicts, more intensified geopolitical uncertainty, and more fragile prospects for global and domestic economic growth:
Participants generally judged that downside risks to the outlook for economic activity had increased somewhat since their July meeting, particularly those stemming from trade policy uncertainty and conditions abroad. In addition, although readings on the labor market and the overall economy continued to be strong, a clearer picture of protracted weakness in investment spending, manufacturing production, and exports had emerged. Participants also noted that there continued to be a significant probability of a no-deal Brexit, and that geopolitical tensions had increased in Hong Kong and the Middle East. Several participants commented that, in the wake of this increase in downside risk, the weakness in business spending, manufacturing, and exports could give rise to slower hiring, a development that would likely weigh on consumption and the overall economic outlook.
Moreover, the participants also expressed their concerns about something we have been writing about for months, i.e., the inverted yield curve and increased odds of recession in the near future:
Several participants noted that statistical models designed to gauge the probability of recession, including those based on information from the yield curve, suggested that the likelihood of a recession occurring over the medium term had increased notably in recent months.
Implications for Gold
What does it all imply for the gold market? Well, the latest FOMC minutes show that the Fed's assessment of balance of risk became more bleak. The recent downturn in manufacturing can only strengthen the pessimistic stance of the FOMC. Plus, Trump has just introduced travel bans on Chinese officials and trade bans on certain China companies - and that doesn't bode well for a swift, lasting and comprehensive trade disputes resolution. And the odds of no-Brexit deal have increased.
Yes, the labor market remains strong. But in a sense, it only confirms the dismal outlook: companies hire workers instead of investing in capital equipment because they are unsure of the future and it's it is easier to fire employees than to write off investments.
Hence, although the recent minutes are not revolutionary, they indicate that the FOMC may trim interest rates in October (or in December) for the third time this year already. Yes, the macroeconomic data does not justify another cut, but the downside risks are still present while the industrial sector entered recession. And this is simply what the markets want, given the high bets on the dovish move. Yes, some FOMC members are against it. But the Fed may simply deliver a cut with attached hawkish message.
This is good news for the gold market. Sure, as this is exactly what markets expect, the move would probably not significantly impact the price of the yellow metal. However, it creates a conducive environment for gold prices from the fundamental point of view. The bullion gained initially after the minutes were published, as the chart below shows.
Chart 1: Gold prices from October 8 to October 10, 2019.
This supportive environment is a dovish shift among the U.S. central bankers. On Tuesday, Powell said that the Fed would "soon announce measures to add to the supply of reserves over time." So, what if investors took steps to add to their gold holdings over time?