Chairman for People and Arrogant Eurocrat
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Two of the most powerful men in the world. Trump? Putin? Xi? Nah. Chairman Jerome Powell and President Mario Draghi. Let’s analyze their recent press conferences!
Powell â€“ Chairman for People
In the last edition of the Gold New Monitor, we promised that we will elaborate on the Powell’s and Draghi’s press conferences. It’s high time we fulfilled the promise.
The first thing that strikes you when watching Powell’s press conference is his style. He is more plain-spoken than Yellen, who liked academic mumbo-jumbo, or Alan Greenspan, who said he’d mastered the art of mumbling “with great incoherence.” Instead, Powell styles himself as Chairman for People who wants to improve transparency. Starting in January, the Fed will hold press conference after every policy meeting. It will give the Fed more room to raise (or cut) interest rates instead of waiting until meetings with press. It should increase the uncertainty about the timing of the Fed’s hikes.
On the other hand, the improved communication should reduce uncertainty among investors, which should be negative for the gold market. Moreover, the shift toward plain-spokenness could signal that tighter monetary policy is approaching and the Fed tries to communicate it in a way the public can understand.
Indeed, as one of the journalist noticed, the Fed is about four interest rate increases away from what might be considered a neutral fed funds rate. For years, the economy needed accommodative policy. But as the economy has strengthened, the Fed started to normalize policy:
And, you know, as I mentioned earlier, for a long time, the economy has needed accommodative monetary policy. As the economy has recovered, we've been gradually raising rates and we will -- we will be at a place relatively soon when -- again, assuming we stay on this path, when interest rates will be in the zone of what FOMC participants think is roughly neutral. And at that point, it would no longer be accurate for us to say that the Committee thinks that policy is accommodative. We know that's coming. We kind of don't think it's here yet, but it's certainly coming.
What does it mean? Well, the end of accommodative policy is coming. Brace yourself for further tightening, although very gradual. The more hawkish Fed â€“ especially given economy being “in great shape” â€“ should be rather negative for the gold market.
Draghi â€“ Arrogant Eurocrat
Contrary to the plain-spoken and transparent Powell, Draghi was intentionally obscure during his press conference. When asked what does it really mean that interest rates will remain unchanged “through the summer of 2019”, he replied:
Well, the first question is really, I can only respond reading again what this means, “We expect them [key ECB interest rates] to remain at their present level at least through the summer of 2019, and in any case for as long as necessary.” Here the intention is to give a time dimension but not a precise one, for a variety of reasons. One of which is that it's both state contingent; in other words, we have to look at the general situation of the convergence process and its state.
Draghi also did not like the question about when the Europeans will be able to see rates at more normal levels. His reply was amusing:
Now, as you've seen however these policy rates being what they are, as low as they are, don't imply that what’s being claimed very often: that the savers are being deprived of their income, of their interest, because savers can well invest in other assets as well and they have done so.
What a logic! We stole your coat, but you can go to the shop and buy a fur! Of course, people adapted, but ultra low interest rates caused a rally in housing prices. Don’t you see this, Mr. Draghi?
He was also very arrogant about the euro. Asked about the Italian turmoil, Draghi told reporters that
the euro is supported, is the currency of 340 million people and has â€“ enjoys now - a 74% support across the citizens of the euro area. And more countries want to join the euro today. You can take your conclusions, but one conclusion is that it's irreversible because it's strong, because people want it and because it is of no benefit to anybody, to discuss the [euro’s] existence.
Such Eurocrats’ arrogance is the very kindle of the populists’ anger.
Implications for Gold
Draghi sounded dovish in his press conference, but the ECB is starting its tightening nevertheless. The Fed is far more hawkish. But also more advanced in its tightening cycle. They are only four hikes from reaching the neutral level of interest rates. It could be a challenge for the Fed to lift the federal funds rate significantly above the neutral level. It implies that the divergence in monetary policies between the ECB and the Fed is likely to diminish in the medium term. It should support the euro and the gold prices. However, it does not have to come immediately, as investors prefer to be more convinced about the central banks’ stance. The effects should be visible in 2019 or even later, when the impact of U.S. accommodative fiscal policy will wane.