Yellen’s June 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 gold market.

Yellen’s Opening Remarks

As usual, Yellen’s opening remarks were rather dull. She explained that the Fed’s decision to hike interest rates reflected “the progress the economy has made, and is expected to make, toward maximum employment and price stability.” Yellen also pointed out that the recent soft inflation data “have been driven significantly by what appear to be one-off reductions in certain categories of prices, such as wireless telephone services and prescription drugs.”

When it comes to economic projections, Yellen noted that “compared with the projections made in March, real GDP growth is little changed, the unemployment rate follows a moderately lower path, and inflation - although marked down this year (…) – is unchanged over the following two years.” Importantly, the median path for the federal funds rate is also essentially unchanged.”

Last but not least, Yellen said that the US central bank would reinvest proceeds from its holdings only to the extent that they exceed gradually rising caps on reductions in its securities holdings. We analyzed the addendum to the Policy Normalization Principles and Plans in Friday’s GNM.

Q&A Session

The questions and answers session was more interesting, although without any shocking news. First of all, Yellen downplayed worries about soft inflation, noting that investors should not overreact to a few readings, data on inflation can be noisy, while there were some idiosyncratic factors which “have held down inflation in recent months.”

There was one interesting question about the exact date of the beginning of balance sheet normalization and whether it could start at the same time as the next interest rate hike. Yellen did not rule it out, answering that the Fed’s had made no definite decision on the timing of the initiation of the plan. However, if the economy evolves in line with its expectations, the U.S. central bank could put this into effect relatively soon. Analysts are divided over whether the Fed will lift rates in September and then make balance-sheet changes in December, or do it in reverse order, or do both at the same time. According to the markets, the Fed will hike not earlier than in January 2018, although we bet on December 2017. So, we believe that the US central banks will implement its balance sheet normalization plan earlier, perhaps in October (after an earlier announcement), to avoid an overload of hawkish decisions at the same time. However, it is worth remembering what Yellen said about the unwinding of the Fed’s balance sheet: “this will just be something that runs quietly in the background”, so investors should not pay too much attention to this.

Conclusions

Summing up, Yellen took a lot of questions about soft inflation, but dismissed these concerns. The message is clear and rather hawkish. The Fed is on autopilot to raise interest rates, no matter what the data says, especially that rates are now back above 1 percent and nothing bad has happened so far. The U.S. central bank is going to start its balance sheet normalization and hike once more this year, which is rather bad news for the yellow metal, which prefers dovish monetary policy. Surely, weak U.S. economic data could support gold prices, but the recent rise in real interest rates after the FOMC meeting should exert downward pressure on gold, especially if market expectations of the federal funds rate rise. Now, markets are pricing in only about a 40 percent chance of a rate hike by the end of December, so there is further potential for increases – if the investors believe the Fed’s outlook, gold will probably suffer. 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.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor