Powell And Yellen Sound Upbeat. Don’t They Like Gold?

Both Powell and Yellen testified before Congress. They sounded upbeat on the U.S. economy, but gold’s reaction was weak.

What a combo! Both Fed Chair Jerome Powell and the U.S. Treasury Secretary Janet Yellen testified before Congress this week. They spoke about the economic response to the economic crisis caused by the Covid-19 pandemic and the Great Lockdown.

In his prepared remarks, Powell sounded rather hawkish, as he noted that “the recovery has progressed more quickly than generally expected and looks to be strengthening.” As well, during the Q&A session, the Fed Chair seemed to be very confident about the economy and the central bank’s monetary policy. In particular, Powell told senators that 2021 was “going to be a very, very strong year in the most likely case.”

He also downplayed worries about higher inflation expressed by some lawmakers, arguing that the environment of low inflation we have observed for years before the epidemic won’t change anytime soon:

We think the inflation dynamics that we’ve seen around the world for a quarter-century are essentially intact — we’ve got a world that’s short of demand, with very low inflation. We think those dynamics haven’t gone away overnight, and won’t.

And Powell dismissed concerns about the supply disruptions as well, saying that “a bottleneck, by definition, is temporary”.

In a sense, Powell is right. A lot of supply disruptions are short-lived. But there are more inflationary factors operating right now, to name just a surge in the broad money supply. So, I’m afraid that he might be too conceited and understated the risk of higher inflation. You know, a lot of economic trends last – until they don’t. I’m referring here to the fact that the macroeconomic conditions change not gradually but rather abruptly. Inflation may remain low as long as inflation expectations are well-anchored, but if they become unanchored, inflation may rise quickly.

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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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