Yellen’s September 2017 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.

Do Not Fear Hurricanes

In her opening remarks, Yellen noted that economic activity has been rising moderately so far this year, the labor market has improved further, while inflation has been running below the Committee’s 2 percent longer-run objective. She has been repeating that for months, so no surprises here.

However, there were some interesting novelties. First, Yellen addressed the recent hurricanes which hit the U.S. She said that their effects “are unlikely to materially alter the course of the national economy beyond the next couple of quarters.” Hence, although the economic growth will be held down in the third quarter, it should bounce back soon. Thus, gold bulls should not buy the yellow metal counting on the negative impact of Harvey, Irma and Maria on the U.S. economy.

Dovish or Hawkish?

Second, Yellen pointed out that although the median path for the federal funds rate is essentially unchanged compared with June’s projections, “the median estimate of the longer-run normal value edged down to 2.8 percent.” Does not that mean that the September FOMC meeting was dovish? Well, compared to the projections made in June, there was indeed a dovish change. However, what really matters for investors is the nature of the event relative to the markets’ expectations. And given the soft market path of the federal funds rate, the recent FOMC meeting was hawkish, even if its tone was objectively unchanged or even slightly more dovish in absolute terms than the last time around.

Third, Yellen addressed the balance sheet normalization shortly. This program will start in October and through December “the decline in our securities holdings will be capped at $6 billion per month for Treasuries and $4 billion per month for agencies.” These caps will gradually rise, but they will not pass $30 billion per month for Treasuries and $20 billion per month for agency securities in order to minimize potential market strains. Although quantitative tightening raises fears as an unprecedented program, we believe that its economic impact will be limited. Again, gold bulls should not hope for the collapse of financial markets due to balance sheet normalization.

You Know Nothing, Janet Yellen

If you are familiar with the universe of A Song of Ice and Fire, you are aware that that Jon Snow knows nothing. But the questions and answers session revealed that he might not be the only one. Indeed, when Yellen was asked about the lack of signs that core inflation was heading towards the Fed’s goal, she basically replied that neither she nor the FOMC had any idea why inflation remained subdued. Here is what she exactly said (emphasis added):

“Now I recognize and it's important that inflation has been running under our 2 percent objective for a number of years and that is a concern, particularly if it were to translate into lower inflation expectations. For a number of years there were very understandable reasons for that shortfall and they included quite a lot of slack in the labor market, which my judgment would be has largely disappeared, very large reductions in energy prices and a large appreciation of the dollar that lowered import prices starting in mid-2014. This year, the shortfall of inflation from 2 percent, when none of those factors is operative is more of a mystery, and I will not say that the committee clearly understands what the causes are of that.”

Is that not a beautiful statement? We just don’t know – or we just don’t care – and what will you do to us? Indeed, the Fed still believes that the shortfall of inflation – whatever caused it – will be only temporary. So, it should not alter the Fed’s plans. Investors should, thus, brace themselves for the next hike in December. Actually, they already did, as the market odds of such a move are currently above 70 percent. However, markets seemed to be pricing in still a shallower path of rate hikes than the Fed does in its economic projections. Therefore, there is room for further upward adjustments which would not be positive for the gold market. But a lot may happen until December. 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.

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