Dovish Fed And Higher Inflation Equals Stronger Gold

The latest FOMC minutes were dovish, especially in light of the recent increase in inflation. That’s good for gold.

Last week, The Federal Open Market Committee (FOMC) published minutes from its last meeting in March. They show that – in light of positive economic indicators – the members of the Committee turned out to be more optimistic about the U.S. economy since the previous meeting. But this is what we already know from the March economic projections.

What is new and much more important is that Fed officials expressed the view that despite all the progress, the economic situation remained unsatisfactory with many indicators still far from the pre-pandemic level and the Fed’s long-term targets:

Despite these positive indicators and an improved public health situation, participants agreed that the economy remained far from the Committee's longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook.

In consequence – and this is probably the key message from the recent minutes – the FOMC members reaffirmed that they are in no rush to taper the quantitative easing. Furthermore, the U.S. central bank will announce a change in the pace of asset purchases well in advance:

Participants noted that it would likely be some time until substantial further progress toward the Committee's maximum-employment and price-stability goals would be realized and that, consistent with the Committee's outcome-based guidance, asset purchases would continue at least at the current pace until then. A number of participants highlighted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases. The timing of such communications would depend on the evolution of the economy and the pace of progress toward the Committee's goals.

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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 ...

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