Gold Weakens After FOMC Minutes

The recent minutes show that the Fed is divided over future rate hikes. How should gold investors react?

To Hike, or not to Hike, That Is The Question

As Chairman Powell has been good at telegraphing the US central bank’s plans, the recent FOMC minutes do not contain too many surprises. In January, the Fed took investors by surprise, saying that it could be patient on interest rates. The minutes elaborated on this, explaining that a patient approach offers many benefits – additional data would shed some light on the recent softness in inflation, would enable the Fed official to observe effects of past rate hikes and would allow time for a clearer picture of trade and fiscal policy, and the state of the global economy – and only few risks, as inflationary pressure is muted, while asset valuations less stretched:

Participants pointed to a variety of considerations that supported a patient approach to monetary policy at this juncture as an appropriate step in managing various risks and uncertainties in the outlook. With regard to the domestic economic picture, additional data would help policymakers gauge (…) whether the recent softness in core and total inflation and inflation compensation would persist, and the effect of the tightening of financial conditions on aggregate demand. (…) Participants noted that maintaining the current target range for the federal funds rate for a time posed few risks at this point.

However, the minutes show that the Fed is divided on how long it should be patient. One camp of several participants still opts for a federal funds rate hike later this year, if the economy evolves in line with the expectations, while the several other officials argued that interest rate increases might be needed only if inflation was higher than expected:

Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year; several of these participants argued that rate increases might prove necessary only if inflation outcomes were higher than in their baseline outlook. Several other participants indicated that, if the economy evolved as they expected, they would view it as appropriate to raise the target range for the federal funds rate later this year.

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