May FOMC Meeting and Gold

Yesterday, the Fed released its most recent monetary policy statement. How can it affect the gold market?

In line with expectations, the Fed kept the interest rates unchanged at between 0.75 and 1.00 percent. As we had predicted yesterday, the statement was little changed, but the U.S. central bank acknowledged the slowdown in economic growth. However, it pointed out that the labor market had continued to strengthen, the fundamentals underpinning the continued growth of consumption had remained solid, while near-term risks to the economic outlook had continued to be roughly balanced. And the weakness in economic growth was considered to be only temporary:

“The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced”.

Hence, the Fed is on track to raise interest rates later this year. Indeed, the market odds of a June hike increased from 70.5 percent to 75.1 percent, according to the CME Group FedWatch. The statement was thus considered hawkish by the markets, which send gold prices south, as one can see in the chart below.

Chart 1: The price of gold over the last three days.

(Click on image to enlarge)

The key takeaway is that the Fed did not change its monetary policy. However, the U.S. central bank described the slowdown in economic growth in the first quarter of 2017 as likely transitory. Hence, the Fed signaled that it still remained on track to gradually raise interest rates. The statement was more hawkish than expected, which is bad news for the gold market. Indeed, the price of gold fell to a one-month low as the dollar firmed after the publication. Now, all eyes are on Friday’s payrolls and the Sunday outcome of the second round of the French presidential election.