Hawaii Six O - Gary Wagner
This Is What It Sounds Like When The Fed Speaks
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Precious metals continue to react favorably as market participants and traders digest the most recent statement from the Federal Reserve which was released at the conclusion of yesterday’s FOMC meeting.
There is no doubt about it, since the beginning of the year the Fed has done a major pivot from that of a hawkish demeanor with continued interest rate hikes this year, to a much more neutral and dovish monetary policy by the Federal Reserve.
This pivot began emerging in January when for the first time in many years they omitted their dot plot from the FOMC statement. Yesterday’s statement from Chairman Jerome Powell revealed that the Federal Reserve has no intention of raising rates this year at all, and only one rate hike next year was music to ears of investors.
As reported by MarketWatch, Tyler Ritchie, co-editor of the Sevens Report said, “The accommodative stance by the Fed and dovish shift in rate hike expectations is bullish for gold as interest rates declined across the board. This adds to the recent trend of declining real rates and that is decidedly positive for gold.”
Then there is balance sheet of assets that the Federal Reserve has been quietly liquidating on autopilot since 2015. Initially the autopilot contained a specific dollar amount to be liquidated on a monthly basis, starting at $10 billion per month. The quantity would be automatically raised on a quarterly basis.
At the end of February Chairman Powell announced that they would take the asset liquidation off of autopilot, and announced the modified monetary policy in the statement released following the March FOMC meeting. True to his word yesterday the Fed revealed they would begin to taper the pace of their asset’s liquidation in May, and completely cease the monthly asset’s liquidations in September of this year.
The Federal Reserve has accumulated assets comprised of mortgage backed securities and bonds to the tune of $4.5 trillion by the time they had completed their quantitative easing programs. Currently their balance sheet has been reduced to $4.2 trillion, however Powell statement in February revealed that they would not liquidate the vast majority of these assets at this time, and leave a minimum of $3 Trillion on their books.
The more dovish tone set by the Federal Reserve since January will have a long-lasting effect on U.S. equities, the precious metals, and most importantly the economic growth in the United States. These factors have created a scenario in which it is likely that both equities and the precious metals will run in tandem to the upside over the next quarter, and beyond.
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Wishing you as always, good trading,