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Chairman Powell sets the record straight, no rate hike for at least two years

Commentaries & Views

In the words of ‘Hans and Franz,’ characters from a Saturday Night Live skit by Dana Carvey and Kevin Nealon, Fed Chairman Jerome Powell “wants to pump … you up, America.”

Today this month’s FOMC meeting concluded, in both the statement as well as the words spoken by Chairman Powell made it emphatically clear that the Fed has no intention whatsoever to raise interest rates until 2022, or 2023.

This was made crystal clear by releasing their latest “dot plot,” which showed a unanimous decision to leave rates between zero and 25 basis points throughout 2021. It showed that the majority vote also believes the best course of action is to keep interest rates where they are in 2022 and 2023. There were only four dissenters who believe that they should raise rates in 2022 and seven dissenters who believe they should raise rates in 2023.

Chairman Powell acknowledged some positive news on the economy as he forecast that GDP will move from 4.2% to 6.5% by the end of the year. He stated that they would continue their quantitative easing by purchasing $120 billion worth of assets each month and will continue this process for the next couple of years.

He did not speak about any action the Fed might take due to the rising yields in U.S. Treasury notes. Many analysts had hoped he would address this in a similar manner to QE 3, which was also called operation twist, in which they bought and sold bonds with different maturity timelines.

The main takeaway was the commitment by the Federal Reserve that the actions by the Fed in regards to the economy will be solely based upon the pandemic rather than solid economic data. He also made it clear that the dual mandate of maximum employment and an inflation rate of 2% has been adjusted so that their dual mandate is more a single mandate of full employment as he acknowledged that he expected inflation to run as high as 2.5% this year.

His statements were much stronger than his last public appearance during a Wall Street Journal webinar, continuing to underscore the Federal Reserve’s commitment to be patient and to maintain the current policy even though the economic outlook has absolutely improved over the last 4 to 6 months.

Market participants and traders were exceedingly pleased by his press conference, which sparked a tremendous rally in both U.S. equities as well as gold and silver prices. The fact that he is projecting the economy to grow and unemployment to lessen, coupled with the fact that he has no intent on changing the monetary policy, signaled that the Fed would continue to be extremely dovish over the next few years, even as economic data improves. He stated that that they will continue their current policy until the economy not only rebounds but returns to pre-pandemic days.

Gold basis, the most active April 2021 contract, gained $13.10 today, a 0.76% gain taking current pricing to $1744. Silver also gained 1.57% and is currently trading at $26.41. All of the major indexes were also higher. The rally in both risk-on and safe-haven assets is signaling that a combination of massive fiscal stimulus coupled with an extremely accommodative Federal Reserve will move both of those asset classes in tandem to higher prices.

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Wishing you as always, good trading,

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 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.