Yellen’s Speech In Jackson Hole And Gold

On Friday, Fed Chair Janet Yellen delivered a speech entitled “Designing Resilient Monetary Policy Frameworks for the Future” at the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. What can we learn from it?

September Hike More Likely

As we had expected, Yellen’s speech was a bit hawkish, as she pointed out that the data has recently improved. Although economic growth has not been impressive, it has been sufficient to strengthen further the labor market, according to Yellen. The key sentence from her economic outlooks is this one:

“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Therefore, Yellen’s remarks increased the likelihood of a September hike. The market rate hike odds for the next month jumped from 21 to 33 percent. However, due to presidential election in November, December move still appears to be the most likely outcome – the rate hike chances for that month rose from 51.7 to 59.1 percent. Although we remain skeptical whether the Fed could hike in September, the increase in expectations of such a move is negative for the precious metals market. Thus, the price of gold declined on Friday and could remain under downward pressure in the near future, especially if August nonfarm payrolls turn out to be strong, and other FOMC members also send hawkish signals. For example, Fed Vice Chair Stanley Fischer said that Yellen’s comments were consistent with a September rate hike and possibly two hikes this year. His remarks pushed gold down.

Yellen Speaks Japanese

Although her speech was generally viewed as hawkish, Yellen also made a very interesting dovish point about future potential monetary policy:

“On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets.”

Yellen’s suggestion of expanding monetary policy programs to include other assets is a Japanese idea, since the Bank of Japan buys not only government bonds, but also exchange-traded funds (actually, it owns already around half of Japan’s ETFs market). Surely, Yellen pointed out that “Fed isn’t actively considering these tools”, but why should we believe in it? As a reminder, the Bank of Japan adopted negative interest rates shortly after it denied that it would ever consider such a move. Therefore, Yellen’s discussion of the Fed’s tools available in the future when the next recession strikes counterbalanced her hawkish tone slightly. However, her remarks should not fire up gold bulls. Although she mentioned the possibility of broadening the range of assets purchased by the Fed and called for more government spending (“a wide range of possible fiscal policy tools and approaches could enhance the cyclical stability of the economy”), she did not say anything about negative interest rates or helicopter money.

Conclusion

To sum up, Yellen’s speech given in Jackson Hole was slightly hawkish, but it was an expected outcome. She did not say anything particularly new, but her upbeat tone about the U.S. economy and the case for an interest rate hike increased the market odds of an increase in federal funds rate in September. We still consider December as a more probable time for an interest rate hike, but the change in expectations should be a headwind for the shiny metal in the near 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.