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Fed says no hikes in 2020. What about gold?

Commentaries & Views

The Fed kept the interest rates unchanged in December. The statement was rather hawkish, while the dot-plot rather dovish. What does such a mix imply for the yellow metal?

Fed Keeps Interest Rates Unchanged

Wednesday, the FOMC published the monetary policy statement from its latest meeting that took place on December 10-11th. In line with expectations, the U.S. central bank left the federal funds rate unchanged at 1.50 to 1.75 percent:  

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective.

The pause means that the FOMC has really completed a “mid-cycle” rate adjustments in October. The decision was unanimous, which confirms that there is no appetite for further cuts among the U.S. central bankers, at least not now.

Another important change was removing the part about the remaining uncertainty about the outlook. Instead, the Fed added the sentence that “the Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity (…)”. It suggests that the U.S. central bank does not expect more easing of its monetary policy in the near future. That’s a rather hawkish news, which is bad for the gold market.

No More Cuts, No More Hikes in 2020

But do not worry. The Fed published also the updated dot-plot. It shows no rate hikes in 2020 and just one in 2021, which is clearly a dovish change since September where the previous economic projections were published. Back then, the FOMC also expected no rate hikes next year and just one in 2021. But the Fed thought that the federal funds rate would be 1.9 percent at the end of 2019 and 2020, 2.1 percent in 2021, and 2.4 percent in 2022. While right now the U.S. central banks sees the interest rates at only 1.9 percent at the end of 2021, and 2.1 percent at the end of 2022. It means that the future path of interest rates will be flatter than expected.

Curiously enough, the Fed’s stance will be easier without any particular economic justification: the whole path of expected growth in GDP and overall inflation is unchanged, core inflation is slightly down this year, while the unemployment rate got reduced over the whole path! But the lover level of the federal funds rate should be supportive for the gold prices, anyway!

Implications for Gold

Indeed, the immediate reaction of gold to the FOMC statement was positive, as the chart below shows. The price of the yellow metal rose from $1,470 to $1,478 during the first hour after the publication of the fresh announcement and economic projections (although the price has declined somewhat later).

Chart 1: Gold prices from December 10 to December 12, 2019.

But what to expect in the future? Well, the Fed will certainly talk a good deal about its neutral stance. However, we all know that the U.S. central bank is not truly neutral, for it has clear dovish bias. For years, the Fed projected higher interest rates that they actually turned out to be in reality. And the U.S. central bank is not eager to take interest rates back to the pre-crisis level. Not at all! As Powell said during his press conference, “I would want to see inflation that’s persistent and significant” before raising rates again. That’s huge declaration which means that Powell gave up on any try to normalize the interest rates.

So, the rule of thumb is that lack of clearly hawkish policy means dovish policy. Especially when the next economic downturn or a financial crisis arrives. From the fundamental point of view, such a rule is supportive for gold prices, so there are good chances fundamentally speaking that 2020 would deal the gold bulls a reason to celebrate.

There are also decent odds that the coming days will be hot for the gold market. Today, the ECB holds its first monetary policy meeting witch Christine Lagarde as the President of the bank. Also today, the parliamentary elections are held in the UK. Finally, the deadline for rolling out an additional $165 billion in U.S. tariffs for Chinese imports passes on Sunday. Stay tuned!

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