Yellen’s March Press Conference And Gold
The latest FOMC meeting was accompanied by Janet Yellen’s press conference. Let’s analyze the implications of her remarks for the price of gold.
Yellen’s Opening Remarks
Generally speaking, Yellen’s opening remarks were quite boring and predictable. As previously, she pointed out the improving conditions in the labor market, the increasing inflation and the moderate expansion of the US economy. However, there were two interesting novelties. First, Yellen reiterated a note from the statement about low core inflation, which suggests that she did not want to sound too hawkish. Second, she changed – as in the monetary statement – the description of the anticipated pace of future rate increases from “only gradual” to “gradual”, although during the Q&A session, she downplayed the importance of that shift, saying that “this is something that shouldn’t be over-interpreted”. So Yellen first removed the world “only” which could be interpreted as a tiny hawkish change (we are not experts in Fedspeak, but “gradually” seems to be less gradually than “only gradually”), but later she said that it was not relevant. So why did she change the script?
The questions and answers session was much more interesting, even without any breaking news. We learned that Yellen had met with the Treasury Secretary and the President, which, well, is not very surprising, as it is the normal order of things.
More importantly, she admitted that some participants had penciled in some fiscal policy changes into their economic projections. Hence, if Trump fails to deliver them, the Fed may be more dovish than currently expected. It’s an upside risk for gold.
Another interesting issue was that the FOMC added in the statement that the inflation goal is symmetric. As Yellen explained during the press conference, it means that the Fed may tolerate an overshoot for a while. It sounds dovish and seems to be positive for the yellow metal, which often shines when the Fed is behind the curve.
The most important part of the press conference was perhaps Yellen’s answer to the question about why the market had been out of sync with where the central bank had been between the release of the minutes of the previous meeting late last month and her speech in Chicago. She replied that the Fed communication had been clear, but market participants had been influenced by the pattern from 2015 and 2016, when the Fed had raised interest rates only once a year, although it had communicated much more hikes. In short, investors used to neglect the Fed crying wolf, but it seems that the wolf has finally arrived, as the risks to the global economy have diminished. A more aggressive Fed should be theoretically negative for gold, however, it seems that gradual hikes do not harm the yellow metal, at least as long as the Fed is behind the curve.
Summing up, Yellen was cautiously hawkish at the press conference, as her simple message was that “the economy’s doing well” (although she admitted that “the data have not notably strengthened”, when she was pressed by the questions about the downward revision of the GDP forecast by the Atlanta Fed’s tracker). On balance, we may say that, as in 2015 and 2016, the interest rate hike was dovish. This is perhaps why the yellow metal rallied after the FOMC meeting. Actually, each time during the current tightening cycle,, the price of gold began a nice bull run shortly after a hike. Hence, gold may continue its upward move for a while, but investors should remember that the medium-term macroeconomic outlook remains rather bearish for gold, as the US dollar is likely to continue its strengthening against the euro and other currencies. We will write about the impact of the Fed’s latest move on the gold market in more detail in the upcoming edition of the Market Overview. Stay tuned!
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.