FOMC Statement Sends (The Perception of) Silver Sharply Lower as QE3 Hopes Fade Further

Friday March 23, 2012 16:09

The Federal Reserve’s Federal Open Market Committee or FOMC released a somewhat more optimistic rate statement on Tuesday, March 13th.

The FOMC made no mention of further quantitative easing measures in its latest statement, thereby further reducing (managing) expectations of additional quantitative easing measures, and ‘prompting’ a notable selloff in silver.

With respect to inflation, the FOMC observed that, “Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable.”

FOMC Keeps Rates at Historic Lows but Lacker Dissents

The central bank’s monetary policymakers decided to keep its benchmark Fed Funds Rate between zero and 0.25% yet again, as had been anticipated by the consensus of market analysts. 

In addition, the FOMC noted that it “currently anticipates that economic conditions —including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Interestingly, FOMC member and president of the Richmond Fed Jeffrey M. Lacker cast a lone dissenting vote against the latter part of that statement, since he “does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.”

Markets React to the FOMC Statement

The mainstream view is that silver and gold prices reacted by falling swiftly due to the lack of any mention of further quantitative easing measures in the FOMC’s release. This, despite the clearly not-for-profit dumping of contracts as the chairman spoke.

Bond prices also declined in even more dramatic fashion, as yields were pushed sharply higher in anticipation of rising interest rates over the medium term. This was surely an unintended consequence of managing perceptions.

Stocks also gained on the more positive U.S. economic picture painted by the FOMC’s statement, which noted that, “the economy has been expanding moderately” in the month since its last rate statement.  Of course, this is the key sentiment target, and the last real hope for economic growth.

Favorable Fed Bank Stress Test Results Calm Rattled Investor Nerves

Another favorable factor for bank stocks was the release of the Fed’s latest bank stress test analysis, which showed that most large U.S. banks were adequately capitalized to withstand severe financial conditions.

This perfectly timed report soothed markets and investors still recovering confidence in the U.S. banking system after the sub-prime mortgage crisis led to the massive Lehman Brothers bankruptcy in September of 2008. The underlying assumptions regarding ‘severe financial conditions’, along with the definition of how adequate capitalization is calculated are rarely questioned.

Nevertheless, greater confidence in U.S. banks, along with induced selling of precious metals like silver and gold, signal to the mainstream that saving or hedging against further troubles with the financial system are unnecessary.

By Dr. Jeff Lewis,, Editor

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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