Will Fed’s Dovish Shift Support Gold?

Big win for the doves! And for gold, as it jumped above $1,320 amid the soft FOMC statement. What’s next?

Committee Will Be Patient

Yesterday, the FOMC published the monetary policy statement from its latest meeting that took place on January 29-30th. In line with the expectations, the US central bank unanimously kept the federal funds rate unchanged at the target range of 2.25 to 2.50 percent (the Fed also kept other interest rates unchanged and reaffirmed its “Statement of Longer-Run Goals and Monetary Policy Strategy”):

In support of these goals [maximum unemployment and price stability], the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent.

The pause in hiking was not the only change in the statement from the December version. First, the assessment of the economic activity was revised downward a bit. It was described as rising at a ‘solid’ rate, while one month earlier it was a ‘strong’ rate. The next two changes are much more important. The FOMC dropped its pledge of “further gradual” rate hikes. In December statement, one could find the following sentence:

The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.

Now, it’s gone. Instead, the FOMC included a sentence in which it announced being patient:

In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

That decisions seem to be incomprehensible given “generally strong U.S. macroeconomic performance”, as Powell put it. However, the problem is that the Fed has seen some cross-currents and conflicting signals about the outlook, mainly the slowdown in economic growth in China and Europe, unresolved trade tensions or uncertainty about Brexit. Hence, the growing evidence of cross-currents pushed the Fed to become more patient awaiting greater clarity.

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