Powell’s Hearing and Gold

On Tuesday, Powell testified before the U.S. Congress. What do his remarks mean for the gold market?

Yesterday, we wrote about Yellen’s last testimony before the Joint Economic Committee. Her remarks were very interesting, but – sorry, Janet – she is no longer the most important person at the Fed. Surely, she is still the Fed Chair, but markets are forward-looking. For investors, signals from Powell are now more important. So let’s analyze his Tuesday confirmation hearing before the Senate Committee on Banking, Housing, and Urban Affairs.

Powell’s prepared remarks were rather short and cautious, and without any surprises. On monetary policy, the next Fed chair said that the U.S. central bank expected “interest rates to rise somewhat further and the size of our balance sheet to gradually shrink.” Powell also pointed out that he would do everything in his power to preserve the Fed’s independence and nonpartisan status. Powell apparently tried to calm the Democrats who were afraid of Trump’s influence on the new Fed chief. Last but not least, Powell subtly rejected the idea of a more rule-based approach, saying that “we must retain the flexibility to adjust our policies in response to economic developments.”

The hearing was more interesting, as Senator Brown pressed Powell on several issues (mostly on the evaluation of the impact of tax reform). The main message from that part is that Powell will provide continuity and stability. It means that there will be an interest rate hike in December (as Powell noted, “the case for raising interest rates at our next meeting is coming together”) and further increases in 2018. And the Fed’s balance sheet will shrink steadily over the few years, likely to $2.5 to $3 trillion. But the tightening cycle will be very gradual and cautious to avoid disruptions in the financial system. Indeed, Powell claimed: “there is no indication in wages that the labor market is overheating or even hot”. It sounded rather dovish, so there is a hope for gold.

Powell also confirmed that he endorsed easing the burden of financial regulation on smaller banks, although he did not support any radical deregulation for all entities. But his remarks were enough to please the financial market – bank stocks rallied after the hearing. This is indication that the Powell’s leadership in general, and testimony in particular, will not be positive for the gold market. This is because the markets expect a continuation of low interest rates (a gradual approach to normalizing monetary policy), less regulation, lower taxes, and better earnings – such a sentiment is not supportive for the yellow metal.

Summing up, Powell testified before the U.S. Senate. Although he sometimes sounded dovish, the general message was that Powell would provide a continuation of Yellen’s monetary policy. It does not have to be a disaster for gold prices, but it will not be very supportive either. Stay tuned!