No, we are not in Wyoming. But we have carefully followed the Fed’s key conference in Jackson Hole. What does the recent central bankers’ meeting in Wyoming imply for the gold market?
Why Powell Was Dovish In Jackson Hole
The Fed’s annual Jackson Hole Symposium, entitled this year “Changing Market Structure and Implications for Monetary Policy”, sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, is over. But we can feel its consequences well beyond it. So let’s analyze the latest gathering, starting with the Powell’s speech entitled “Monetary Policy in a Changing Economy” (we will come back to the symposium in the future editions of the Gold News Monitor).
Financial markets considered the Fed Chair’s remarks as dovish. The bond yields declined, while the stock market hit record highs. The reason is that Powell dismissed the risk of overheating. Although inflation has finally reached the Fed’s target, the Fed Chair is not afraid that it could get out of control:
While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating.
Actually, Powell acknowledged that inflation is not the best indicator of economic imbalances. Both the dot-com and the housing bubbles emerged despite the low inflation rate:
Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses.
Hence, if there is no risk of inflation and the Fed should look beyond the data on consumer prices, the Fed may be less hawkish than it was expected. With the more dovish central bank, gold may catch its breath.
Why Powell Wasn’t Dovish in Jackson Hole
However, we believe that Powell wasn’t as dovish at Jackson Hole as many analysts believe. First of all, he reaffirmed his attachment to the concept of gradual tightening. Actually, Powell argued that the gradually raising interest rates is the best approach to navigate the Fed between moving too fast (risking the abrupt end of the economic expansion) and moving too slowly (risking a destabilizing overheating): “I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks.” In other words, be prepared for more interest rate hikes, as the Fed is determined to approach gradually closer to the FOMC’s rough assessment of neutral policy stance:
As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.
Moreover, Powell referred a few times to the new paper by a group of top Fed economists who argued that “because monetary policy acts with a lag, waiting for inflation to materialize before reacting is undesirable”. It suggests that the Fed will stick to its policy of gradual tightening even without accelerating inflation on the radar. This is clearly bad news for gold, which shines most during periods of high inflation and low interest rates. But we could have the opposite macroeconomic situation!
Implications For Gold
What does it all mean for the gold market? Well, we expect more of the same for the gold market. Actually, under Bernanke and Yellen, the market has become accustomed to a sluggish Fed which is widely behind the curve. But all changed with Powell – and now investors underprice versus the Fed expectations. The implication is that we could see some hawkish ‘surprises’ in the near future, which could be negative for the gold market. On the other hand, after a few increases since 2015, there is limited room for further upward moves. When the pace of rate hikes slows down, probably around mid-2019 (or, actually, when such expectations start to be common), the yellow metal should catch its breath.
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.