The Daily Nugget: What Will The Fed Decide?

The main headlines this week will be on central banks, three of whom are set to either release statements or meet to decide on policy.

An interesting article on Bloomberg this morning accuses central bank officials of failing to communicate their plans for monetary policy and thereby ‘roiling financial markets, threatening to undermine the confidence of investors, households and consumers and so undoing efforts by central banks to strengthen their economies.’

Given the confusion and volatility surrounding the next FOMC meeting, the above paragraph rings true. Transparency of central banks is anything but and markets are not being given any clarity on decisions. Instead being left to second-guess.

Fed announcement
Tomorrow and Wednesday will see the FOMC meet once again. Ahead of the meeting we expect to see little excitement in the current gold price as traders hold their breath waiting for the outcome. Markets have been a little volatile the past month after Bernanke said the FOMC may look to scale back stimulus measures. Few analysts expect this to happen straight away, some expect by the end of the year, others by as early as September.

Despite rumours that the Fed will wind down asset purchases as of this week, not everyone is convinced this is the right move. St Louis President, James Bullard said last week that inflation below 2% (it is currently at 1.1%) warrants continued easing. The IMF, in its assessment of the US economy released last Friday, urged the Fed to carefully consider any decisions it makes with the international markets in mind. The agency clearly believes easing should continue at its current pace.

Others remain convinced that tapering is inevitable in the future, but that gold is likely to benefit from the uncertainty surrounding the ‘when’ question. TD Securities believe that ‘it is increasingly likely the US central bank will start to progressively reduce the amount of Treasury and MBS purchases in order to avoid an asset bubble or breakout in inflation. Let’s also keep in mind that the Fed started its open ended QE program fully expecting a move towards a recession due to the fiscal cliff and that did not happen.’

A report from the CFTC shows hedge funds and money managers were less bullish last week as they slashed bullish bets on gold and silver futures and options.

In the weeks following the meeting we may well see slightly less blind speculation than we have been in recent weeks as this is one FOMC meeting where Bernanke will hold a press conference after the outcome of the meeting is announced.

Given market speculation over the Fed cutting rates or purchases I suspect Bernanke will be quick to remind the press, no matter the decision, that easing is still going on.

Bank of England – less risk?

The minutes from the latest Bank of England MPC meeting, Sir Mervyn King’s last, will be released this week. Whilst it may give some indication as to where monetary policy is headed in the coming months, no-one can really have much of an idea until Mark Carney arrives with his ‘radical’ plans.

A report just released from the Bank of England, the Systemic Risk Survey, shows that the ‘perceived probabilities of a high-impact event in the UK financial system over both the short and medium term have fallen to their lowest levels since the survey began in 2008.’ So they’re see less risk than they saw pre-crisis? Not that reassuring. For respondents the two the two biggest risks to the financial system, in the UK, are an economic downturn and the Eurozone.

Speaking of the Eurozone employment, consumer confidence and trade statistics will be released. Italy’s trade data for Italy as well as Germany’s ZEW survey will also be published.

HSBC, whilst bullish on gold overall are showing some concern over Indian demand given the weak rupee and increased duties on gold. This morning the Reserve Bank of India will make a decision in interest rates as they try to juggle the weak currency and sluggish economy.