March FOMC Minutes Non-Event For Gold

Yesterday, the minutes of the Federal Reserve's March meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?

Fed Still Worried by Global Turmoil

The January minutes showed that the Fed had been worried by the global turmoil. The recent minutes revealed that the concerns had not gone away:

“(…) participants generally saw global economic and financial developments as continuing to pose risks to the outlook for economic activity and the labor market in the United States. In particular, several participants expressed the view that the underlying factors abroad that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed ongoing downside risks (…) Participants discussed the implications of the global economic and financial developments of the past few months for the medium-term outlook, and they offered different characterizations of the risks to the US economy stemming from these developments. Many participants expressed a view that the global economic and financial situation still posed appreciable downside risks to the domestic economic outlook.”

Fed Notices Softness In Business Fixed Investment

Moreover, in contrast to January when “business fixed investment had been increasing at moderate rates in recent months," the Fed’s officials noted the recent softness in business fixed investment and signs that sluggish growth would continue. They pointed out that “orders and shipments for nondefense capital goods had been about flat. Capital expenditures continued to be depressed by the contraction in the energy sector. Capital spending plans appeared to remain soft”. The slowdown in business fixed investment should translate into a slower economy and, thus, be positive for the price of gold.

Fed Sounds Dovish

Although there were no surprising or unexpected revelations in the minutes, the Fed sounded rather dovish in them. For instance (the emphasis is ours):

“The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff's assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks; in addition, global economic prospects were still seen as an important downside risk to the forecast. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside (…) Several participants indicated that the persistence of global disinflationary pressures or the possibility that inflation expectations were moving lower continued to pose downside risks to the inflation outlook (…) Some noted that recent financial market turbulence provided an important reminder that the ability of central banks to offset the effects of adverse economic shocks might be limited, particularly by the low level of policy interest rates in most advanced economies (…) Many participants indicated that the heightened global risks and the asymmetric ability of monetary policy to respond to them warranted caution in making adjustments to the stance of US monetary policy.”

If we are not wrong, the Fed just admitted that neither monetary nor fiscal policy could help the economy in the case of an adverse economic shock. For us, it is a surprising, though true, coming-out for the policymakers, which should not increase our faith in the central banks.

Fed’s Asymmetry

We do not understand one more thing. The U.S. central bank repeated that there was asymmetry in the ability of monetary policy to respond to different shocks, i.e. the Fed has little room to “ease monetary policy through conventional means if economic activity or inflation turned out to be materially weaker than anticipated, but could raise rates quickly if the economy appeared to be overheating”. It is true, but we do not see how this is an argument for waiting with interest rate hikes (“this asymmetry made it prudent to wait for additional information regarding the underlying strength of economic activity”). On the contrary, if the Fed has little room to ease monetary policy, would it not be prudent for the US central bank to make more room?

Conclusions

To sum up, the minutes of the Federal Reserve’s March meeting are rather dovish and show that the Fed officials are still worried about global developments and the U.S. economic outlook. The FOMC members even admitted that the data relevant in the context of setting monetary policy “include not only domestic economic releases but also information about developments abroad and changes in financial conditions that bear on the economic outlook”. It should be positive news for the gold market in the medium- or long-run, as it implies that the relatively healthy U.S. economy and improving labor market do not warrant a Fed hike if the global economy or financial markets are in turmoil. However, the minutes did not move the gold market appreciably yesterday, as the Fed’s dovish stance had already been known thanks to Yellen’s recent speech at the Economic Club of New York.

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.