Fed QE Taper And Gold

This week the Federal Reserve pre-announced an upcoming slowing in its enormous quantitative-easing money-printing campaign. That QE-tapering warning was widely expected on Wall Street, so it wasn’t a market-moving surprise. Gold is particularly sensitive to Fed policy changes, because of hyper-leveraged gold-futures trading. Expected Fed tightening often triggers selling there, because the US dollar rallies.

The Fed’s Federal Open Market Committee met Wednesday in one of its eight meetings per year. Most of those are uneventful, with no monetary-policy changes. Gradualism is the Fed’s mantra, as moving fast or surprises can really impact markets. This week’s FOMC statement unanimously approved by top Fed officials had a new sentence added, a formal notice that this central bank will soon start slowing QE.

It read “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” That’s pretty vague, as “soon” is subjective with no timeline. Gold initially rallied smartly from $1,776 to $1,787 on the FOMC apparently punting on locking down QE tapering. The US dollar’s leading benchmark, the US Dollar Index, also slumped on that lack of specifics.

Gold’s first reaction was impressive considering this was one of the every-other FOMC meetings that are accompanied by top Fed officials’ individual economic outlooks. Those include where these 18 governors and regional presidents expect their directly-controlled federal-funds rate to be in coming years. Called the dot plot due to its presentation, that proved hawkish with potential rate hikes pulled forward one year.

In the previous dot plot from mid-June, just a third of Fed officials expected to maybe see two quarter-point rate hikes way out into year-end 2023. Even that mere hint of distant-future rate hikes slammed gold, interrupting a strong young upleg. In three trading days starting that Fed Day, the yellow metal plunged 5.2% on extreme gold-futures selling. That was ignited by a powerful 1.9% USDX surge over that same span.

The 2022 rate-hike outlook then was none, as a majority 11 out of 18 officials expected their zero-interest-rate policy to continue prevailing next year. That shifted slightly this week, with only 9 of 18 seeing ZIRP persisting in 2022. 6 saw a quarter-point hike at some point while 3 expect two hikes. Those tallies rose from 5 and 2 at the mid-June meeting. So the first quarter-point hike is now implied by the end of next year.

These dot plots are notoriously-inaccurate forecasters of future federal-funds-rate levels. The Fed chair himself explicitly warned about that in his mid-June post-FOMC-meeting press conference. Examples are legion. The Fed’s last rate-hike cycle started in mid-December 2015. That day the FOMC hiked the first time, the dots predicted four more rate hikes in 2016. But only a single one came a year later in December.

The December-2018 dot plot came on the day the FOMC hiked for the ninth time in that tightening cycle. That day’s dots forecast three more hikes in 2019 and 2020. Yet none of those came to pass, the Fed was done hiking! So seeing the USDX and gold trade in the wake of the quarterly FOMC meetings that include dot plots is super-irrational. Those individual rate outlooks aren’t authoritative and are usually wrong.

But this week’s dot-plot omen of a potential rate hike by year-end 2022 was certainly hawkish, making gold’s post-FOMC surge look all the more impressive. In last week’s essay, I laid out a case arguing gold’s latest “taper tantrum” fueled by heavy-to-extreme gold-futures selling had largely already happened in slow motion in anticipation of the Fed announcement. Gold-futures speculators’ capital firepower is limited.

The real surprise at this week’s FOMC meeting was Jerome Powell’s press conference. Since they can move markets, I watch all of them live. This Fed chair was as hawkish as I’ve ever heard him! Reporters naturally asked Powell about the QE-taper timeline. He was very clear, bordering on emphatic, that actual QE tapering would likely be announced at the FOMC’s next meeting. That is coming on November 3rd!

Powell was also asked if a bad monthly US jobs report in early October would change his mind on getting tapering underway. He said no, that the economic-data trends were more important than any individual print. He even declared the Fed’s colossal $120b-per-month QE money printing would likely be done by the middle of next year. Powell sounded like that timeline was firm unless some catastrophe happens.

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William K. 3 weeks ago Member's comment

How about, instead of some slight reduction in purchaes, a "cold Turkey" Halt of the purchases, along with a friendly note to congress that they need to look elsewhere for funds, OR cut back spending. Certainly it would make waves, but tht is OK.