Yellen’s March Press Conference And Gold

The recent Fed’s statement on monetary policy was accompanied by the FOMC’s Summary of Economic Projections and Yellen’s press conference. What can we learn from the latter?

Why Didn’t Fed Hike?

Yellen’s press conference was full of interesting questions and answers. We will focus on the two most important issues for the gold market. First, markets do not understand why the Fed did not raise interest rates. As Steve Liesman from CNBC, the author of the first question, pointed out, the inflation had gone up, while the job market had further strengthened. But the Fed paused its tightening cycle. Yellen replied that inflation had picked up only because of rises in categories that tend to be quite volatile without very much significance. So much for the Fed being data-dependent. The Fed is not data-dependent; it is rather data-interpretative. It is the highest oracle deciphering obscure data; therefore, it may change its policy at any time, because everything depends on the interpretation of data. Raw data is meaningless, what really matters are narrations. This is the true role of central bankers: being credible storytellers. For us, the Fed’s credibility is declining, which should be positive for the gold market in the longer term. The lack of a rate hike in March means that the U.S. central bank cares more about the broad global slowdown than about domestic U.S. issues. Moreover, the FOMC members have previously projected four hikes, now they are saying only two. But what’s the guarantee that they will not change their mind again?

Fed Isn’t Considering NIRP

Second, it seems that the Fed took a more hawkish stance on the negative interest rates. Let’s quote Yellen at length:

“[The negative interest rate policy] is not actively a subject that we are considering or discussing. The Committee continues to feel that we are on a course where the economy is improving, and inflation is moving back up. And as I indicated, if events continue to unfold in that way, we are likely to gradually raise rates over time. Again, that's not fixed in stone. We'll watch how the economy behaves. We're prepared to respond if things transpire differently. But we are not spending time actively debating and considering things we could do for additional accommodation and certainly not actively considering negative rates. We are looking at the experience in other countries, and I guess I would judge they seem to have mixed effects, you know, some positive and some negative things. But look, if we found ourselves in the unlikely situation where we needed to add accommodation, we have a range of tools, and we know from the things we did in the past that we have a number of options with respect to the maturity, for example, of our portfolio, with respect to asset purchases or forward guidance that remain available to us that are tools we could turn to in the unlikely event that we need to add accommodation. So, negative rates is not something that we're actively considering.”

As one can see, Yellen was much more skeptical about the NIRP than in February when she said before the Congress that the Fed was taking a look at it in order to be prepared if things went south. It is very surprising that something that one month ago was worth looking at in the spirit of prudent planning. Now it is not worth being actively debated. What happened? One would think that the economy has strengthened so much that the NIRP is no longer being considered. But wait, if the economy has strengthened so much, why did the Fed not raise interest rates and why do the FOMC members lower their projections of appropriate monetary policy? The only explanation that comes to our minds is that recent market volatility partially caused by the fears of the NIRP frightened the Fed. The de-emphasizing of negative interest rates by the Fed is bearish for the gold market. Some analysts even think that the recent rally was only about the NIRP and the price of gold will decline as soon as the fears about negative rates dissipate. We do not agree that the recent rally was only about NIRP, however, it certainly supported gold prices. The de-emphasizing of NIRP would be an important test of gold’s strength in the nearest future.

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.