Is Fed worried about the coronavirus and will Powell talk about it?
(Kitco News) Is the Federal Reserve considering the potential economic fallout from the coronavirus at its January meeting and will the Chair Jerome Powell mention it during the press conference on Wednesday?
The biggest market mover this past week has been the coronavirus — more specifically the fears surrounding the spread of the virus and the potential economic fallout from it when it comes to travel and trade.
“The virus is the wild card for the Fed. But, don’t expect any changes at this meeting,” Gainesville Coins precious metals expert Everett Millman told Kitco News on Monday. “The basic case is that they are neutral on rates and don’t do anything.”
The U.S. central bank is unlikely to react to the virus fears in any way, which is why Millman is ruling out a rate cut on Wednesday. The CME Fed Watch tool is currently pricing in an 87.3% chance of no change in rates at the January meeting.
But at the end of the day, it is all about market perception, Millman pointed out.
“There seems to be actual economic damage that could be happening because of the coronavirus — China closing things off and other countries will probably be wary of trade. That is going to be in the back of the minds of FOMC members during this meeting because everything else would seem to be kind of the same as at end of last year … in terms of economic data,” he said.
Markets have reacted to the virus spreading from China into Europe and North America, with the Dow seeing the biggest selloff since October on Monday. And the precious metals like gold advancing to three-week highs.
In the latest update, the death toll from the coronavirus surpassed 100 people on Tuesday with the total number of cases reaching nearly 4,700 around the world. Calming the markets, however, were reports that health experts believe the risk in the U.S. was low and that health officials were working to fast-track a coronavirus vaccine.
“It comes down to market perception. If Powell comes out and seems dovish, equity markets would like that. At the same time, it is good for precious metals. If the Fed indicates that they are standing prepared and ready to step in and ease policy, that is also positive for gold,” Millman said.
Overall, rates as only likely to go down this year, according to Millman, who cited low inflationary pressures and the Fed having the room to lower rates by another 50 basis points.
“I am not completely sold on the idea that the Fed will remain neutral for the whole year. That is unlikely. And its rates are going anywhere, they are going down,” he said. “Fed’s rate … is still the highest interest rate you can get in the world right now. So, there is room for the central bank to cut in terms of how our central bank policy compares to that of the rest of the world.”
The global low-interest-rate environment will also remain favorable for gold throughout the year as the trend of negative-yielding debt only accelerates.
“Until inflation is above trend — not just at 2% target — the central banks won’t stop cutting rates,” Millman pointed out.
Gold’s year-end target: $1,750
Even though gold looks a little overbought at the moment, Millman is bullish on the yellow metal long-term, seeing prices go as high a $1,750 an ounce towards the end of 2020.
“We rallied quite a bit in a very narrow window of time. And usually, it is followed by a pretty big sell-off, which hasn’t happened since the rally started late last year,” he said.
Millman is not ruling out a pullback below $1,550 and even below $1,500 an ounce on a temporary basis.
“That’s not out of the realm of possibility,” he said. “Ultimately, by the end of the year … we could rally up to $1,750 on the high-end. But gold will not average as high as $1,600 for the year.”
Millman’s optimism in the precious metal comes from large institutional investors getting into the space.
“When you look at who is driving that trade, it really hasn’t been the small individual traders, it has largely been institutional investors like hedge funds and central banks. To me, it makes it a very strong safe haven signal. And they don’t seem to be willing to sell it off,” he stated.
Aside from keeping a close eye on the monetary policy across the world, Millman is also carefully eyeing geopolitics as the key driver for gold this year, including tensions in the Middle East, China trade talks, and Brexit drama.
“We have ‘Phase Two’ of the trade war that still needs to be negotiated with China. And that is going to be somewhat disrupted by the coronavirus problem because I would imagine it would make the U.S. a little wary of incoming trade from China,” Millman said.
Brexit is also not a done deal yet, he noted. “There is a little bit overconfidence that Parliament is now on the same page about Brexit. But there is still a good chance that they can’t come to terms with the EU and it ends up being a no-deal exit.”