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Federal Reserve Upbeat On U.S. Economy

Editor's Note:The article will be updated continously, adding new information from the report and comments during Fed Chair Janet Yellen's post-meeting press conference.

(Kitco News) - The Federal Reserve has become slightly more optimistic on the U.S. economy and labor market, according to its latest monetary policy statement.

The Federal Open Market Committee (FOMC) meeting left U.S. interest rates unchanged in its zero-bound range, as expected, but could be setting the market up for an eventual rate hike later in the year as it sees some improvement in the nation’s economic growth.

fed dot plots

The statement noted that "economic activity has been expanding moderately after having changed little during the first quarter." The committee's view on the labor market is that underutilization has "diminished somewhat."

The statement was an improvement from the April meeting, when the Committee said economic growth has slowed during the winter months because of “transitory factors.”

As expected, the committee did not provide any future guidance on an interest rate hike. However, it did modify its stance saying, "The Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation."

Jim Wyckoff, senior technical analyst at Kitco.com, said gold prices only saw a little movement following the release of the monetary policy statement.

Although the FOMC was slightly more optimistic in its monetary policy statement, it downgraded its economic projections for this year. According to the central bank's economic outlook, it expects U.S. gross domestic product to expand between 1.8% and 2.0%, down from March's projection of 2.3% to 2.7% growth. The central bank is a little bit more positive in the long-term, expecting the economy to grow 2.4% to 2.7% in 2016, up from the previous forecast of up 2.3% to 2.7%. The year 2017 is expected to see economic growth between 2.1% and 2.5%, up from March's forecast of up 2.0% to 2.4%.

The Fed also raised its projection for the U.S. unemployment rate, expecting to see it between 5.2% and 5.3% this year, up from March's forecast of 5.0% to 5.2%. The year 2016 forecasts remained unchanged with a unemployment rate between 4.9% and 5.1%; 2017 forecasts were only slight modified with the central bank expecting an unemployment rate of 4.9% to 5.1%, up from the previous forecast of 4.8% to 5.1%.

The Fed is also expecting inflation to remain subdued this year, with its forecast for personal consumption expenditures (PCE) to remain unchanged at 0.6% to 0.8%. There was only a slight adjustment to the 2016 forecast as the Fed sees inflation between 1.6% and 1.9%, compared to the previous forecast of up 1.7% to 1.9%. The Fed's 2017 outlook remained unchanged at 1.9% to 2.0%.

Core inflation expectations, which strip out volatile food and energy prices, were also relatively unchanged. For this year, the Fed expects core PCE to come in between 1.3% and 1.4%, unchanged from the previous report. The 2016 estimates were only slight higher with a forecast of 1.6% to 1.9%, up from March's forecast of 1.5% to 1.9%. The 2017 estimates also saw a similar increase with the central bank expecting core inflation to rise 1.9% to 2.0%, up slight from March's estimate of 1.8% to 2.0%.

The Federal Reserve's interest rate expectations - the dot plots - saw a change in the June report. The votes were pretty evenly spread out for 2015 with members seeing rates anywhere from 0.25% to 0.75%.

Andrew Grantham, senior economist at CIBC World Markets, did not note any surprises in the monetary policy statement or economic projections. He added that the committee members see two rate hikes in 2015, according to the updated dot plot projections.

“There’s nothing here to make us change our call for a first hike in September,” he said.

Millan Mulraine, deputy head of U.S. strategy, agreed that there were no major surprises; however, he is interpreting the stamen as slightly hawkish as its outlook on the labor market has improved.

Progress has been made but more needs to be done - Yellen

In her post-meeting press conference, Fed Chair Janet Yellen said that the U.S. economy has made some progress. However, she reiterated that the committee is still not ready to raise rates as they want to see "decisive evidence that the economic growth will be sustained."

Too but emphasis is being put the lift-off of eventual rate hikes says Yellen. She added that the focus should be on the trajectory of rates, which she said in her opening statement will remain below historical norms.

It is only a matter of time before inflation moves back to the central bank’s target of 2.0%, Yellen said. She said that the U.S. dollar and oil prices are stabilizing, which will boost inflation by later in the year.

Wyckoff added that gold prices starting rallying as the market is interpreting Yellen's comments as dovish as she reiterates that interest rates will remain "highly accomoditive. "

Fed Can't Promise There Won't Be Volatility As It Normalizes Rates

The Fed has been long attentive to the impact of higher interest rates on emerging markets, Yellen said. Although she couldn’t promise there won’t be spill-over volatility in emerging markets, she said the committee is committed to clear communication to limit the impact of eventual rate hikes

Yellen was asked to weigh-in on the ongoing Greece crisis as it has been unable to negotiate a new bailout agreement with its European creditors. Although the U.S. has limited exposure to Greece, Yellen said that the U.S. economy is still at risk of slipover effects in the global economy is Greece defaulted and was forced out of Eurozone.

By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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