Central Bank Weekly: Rebound In Fed Hike Odds Sinks Gold Prices

When looking back at 2019, traders may find that this past week was pivotal on several fronts. The US-China trade negotiations appear to be coming to a crescendo with a summit between US President Donald Trump and Chinese President Xi Jinping in the works for later in March. Concerns over the US economy sliding into a recession have been pushed back, at least temporarily, after Q4’18 US GDP came in above expectations. Elsewhere, the Brexit saga appears to be headed towards de-escalation with the odds of a hasty no deal, “hard Brexit” dropping.

FED CHAIR POWELL’S TONE STOPPED CHANGING

Traders may also remember this week as the week that Fed Chair Jerome Powell ‘found his voice’ after several months of wavering conviction. Between, October and January, there are a handful of occasions in which Fed Chair Powell could be considered to have changed his tone. On October 3, 2018, he indicated that be believed that ‘rates are a long way from neutral,’ implying that many more rate hikes were coming. Then, on November 28, he implied that ‘rates are close to neutral,’ or that the Fed was nearing the end of its hike cycle.

Initially, this culminated in the Fed’s glide path of interest rates being reduced at the December 20 policy meeting. More recently, on January 4 at a roundtable discussion with former Fed Chairs Bernanke and Yellen, Fed Chair Powell said that he was ‘open to changing normalization,’ in effect striking the Powell Put. Then, at the January 30 FOMC meeting, beyond staying ‘patient’ on further moves and ending the policy of ‘gradual rate hikes,’ it was made clear that the Fed was eying the end of its balance sheet run-off by the end of the year.

But traders may now find that Fed Chair Powell’s tone has been fairly consistent over the past month. By using his time on Capitol Hill this week to reaffirm the Fed’s neutral stance, the central bank chief more or less told market participants that the Fed was looking past short-term gyrations.

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