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Gold Prices Spike; Markets Deem Powell Speech Dovish

Kitco News

(Kitco News) - While off their highs, gold is holding on to decent gains as Federal Reserve Chair Jerome Powell signals that the Federal Reserve could be close to ending its tightening cycle.

Powell was relatively optimistic on the U.S. economy noting at the start the nation is close to achieving price stability and maximum employment. However, for many analysts, the key phrase that gives Powell’s comments a dovish tilt are his views that interest rates are close to neutral.

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy--that is, neither speeding up nor slowing down growth,” he said in his speech at the The Economic Club of New York.

The U.S. dollar has dropped sharply with gold pushing past $1,230 an ounce in initial reaction to Powell’s comments. While gold is off its highs, the precious metal continues to hold strong gains. February gold futures last traded at $1,226.30 an ounce, up 0.52% on the day.

Adam Button, senior currency strategist at said that Powells comments could indicate that the Fed will not likely continue to gradually raise interest rate next year.

“Powell hardly mentioned a gradual pace of rate hikes and when he did it was generally in the past tense. At the same time, he said rates aren't on a preset path and highlighted incoming economic data,” he said.

However, not all economists are convinced that Powell has turned completely dovish. Avery Shenfeld, senior economist at CIBC World Markets, said that markets are reading too much into his comments.

“The Fed Chair gave some comfort to those of us who think a 4% fed funds rate would be overkill, by saying that rates today are "just below neutral" and emphasizing that there isn't a pre-set path. But remember that the last FOMC message argued that rates would have to go above neutral in order to end up at a non-inflationary unemployment rate that they judged is higher than the current jobless rate,” he said. “So while our forecast is for only 2 hikes next year (well below the last FOMC dot projection) and an ease in 2020, we don't see this speech as quite as dovish as the market seems to be taking it.”

Four Risks For The Economy

Although Powell highlighted growing risks to the U.S. economy but noted that there are no significant warning signals, looking at excessive leverage, he said that there is not a broad-based buildup of abnormal leverage.

"As with banks, capital levels at insurance companies and broker-dealers appear robust. In addition, securitization levels are far below their pre-crisis levels, and those structures that do exist rely on more stable funding," he said.

Powell noted that funding and credit risks also remain low in the current economic environment.

"Today we view funding-risk vulnerabilities as low. Banks hold low levels of liabilities that are able and likely to run, and they hold high levels of liquid assets to fund any outflows that do occur," he said.

Growing debt, especially at the corporate level continues to be watched carefully but are in line with current economic growth, Powell said.

"The ratio of corporate debt to GDP is about where one might expect after nearly a decade of economic expansion: it is well above its trend, but not yet at the peaks hit in the late 1980s or late 1990s. Further, the upward trend in recent years appears broadly consistent with the growth in business assets relative to GDP," he said.

The final risk Powell highlighted in his speech was asset valuations; however, he added that he doesn't see the danger of bubbles forming in financial markets.

"Looking across the landscape of major asset classes, we see some classes for which valuations seem high relative to history," he said. "We see no major asset class, however, where valuations appear far in excess of standard benchmarks as some did, for example, in the late 1990s dot-com boom or the pre-crisis credit boom. From the financial stability perspective, however, today we do not see dangerous excesses in the stock market."

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