Powell: Inflation Can Rise In 2021 – So What Happens To Gold?

The first FOMC meeting in 2021 has concluded without any changes in monetary policy, while Powell sent a few dovish signals during his press conference.

The FOMC released on Wednesday (January 27) its newest statement on monetary policy. Generally speaking, the statement was little changed. The main alteration is that the U.S. central bank has acknowledged that “the pace of the recovery in economic activity and employment has moderated in recent months”. Wow, how did they notice that? They really must hire professionals! All jokes aside, this modification in the FOMC statement is dovish. Consequently, when analyzed separately, it’s positive for the price of gold.

Another change is that the FOMC now believes that “the ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook”. In December, the Fed thought that the pandemic would impact inflation only in the “near term”, with risks to the outlook “over the medium term”.

However, when considered holistically, the January statement is rather bad for the yellow metal, as the Committee neither changed the federal funds rate nor expanded its quantitative easing program. So we have another month without any additional easing of the U.S. monetary policy. Luckily, the ECB also didn’t loosen its stance, but still, the lack of any fresh dovish moves by the Fed is not helpful for gold.

Luckily, Powell comes to the rescue! Although he generally sounded rather neutral during his press conference, the Fed Chair has sent a few important dovish signals. First, he clearly excluded the possibility of premature tapering and the replay of 2013’s taper tantrum, saying that “the whole focus on exit is premature if I may say. We’re focused on finishing the job we’re doing, which is supporting the economy, giving the economy the support it needs.” The continuation of the quantitative easing, which will take years, is positive for gold.

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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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Monica Kingsley 1 month ago Contributor's comment

It's also my public view that we're in a year when inflation returns on everyone's radar screens, yet I wouldn't say that gold may continue its bearish trend for a while (implications section), no way. To me, gold looks in a very clear sideways trend with bullish overtones, and clearly bullish resolution come spring.