Fed Interest Cuts Rates, Causing Gold Price to See-Saw / Commodities / Gold & Silver 2019

Yesterday, that was already the third time this yearwhen the Fed cut interest rates. In response, the price of gold erased earlierlosses. That sounds a bit fishy. What is going on?

Fed LowersInterest Rates by 25 Basis Points

Yesterday, the FOMC publishedthe monetary policy statement from itslatest meeting that took place on October 29-30th. In linewith expectations, the U.S. central bank cut the federalfunds rate by 25basis points, for the third time in 2019 already:  

Consistentwith its statutory mandate, the Committee seeks to foster maximum employmentand price stability. In light of the implications of global developments forthe economic outlook as well as muted inflation pressures, the Committeedecided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4percent.

Just as previous times, the decision was considered to be an insurance against ongoing risks. Butnot all Committee members were convinced that the U.S. economy needed such aninsurance. Esther L. George and Eric S. Rosengren wanted to maintain theinterest rates unchanged. It suggests an important internal opposition tofurther cuts in interestrates.

No MoreCuts. For Now…

Indeed, it seems that the Fed has exhausted its potential for further interest rate cuts in the nearfuture. This is what the U.S. centralbankers signaled in the statement. In September, they wrote:

As theCommittee contemplates the future path of the target range for the federalfunds rate, it will continue to monitor the implications of incominginformation for the economic outlook and will act as appropriate to sustain theexpansion, with a strong labor market and inflation near its symmetric 2percent objective.

But this time, theyremoved the phrase “act as appropriate” to sustain the expansion, which hadbeen used to signal further monetary easing.

TheCommittee will continue to monitor the implications of incoming information forthe economic outlook as it assesses the appropriate path of the target rangefor the federal funds rate.

The changed statement is more hawkish and indicates that the FOMC has completed a“mid-cycle” rate adjustments yesterday. Hence, the Fed implied not toexpect more cuts for now. This is bad news for the gold market. And indeed, theprice of the yellow metal has initially plunged, as the chart below shows. Butit quickly rebounded.

Chart 1: Gold prices from October 29 to October 31,2019.

Implicationsfor Gold

Gold reversed its downward course thanks to Powell. You see,the Fed Chair excluded the next hikes for some time. He said that inflation would haveto soar to force the Fed to increase the federal funds rate:
We are notthinking about raising rates right now (…) I think we would need to see areally significant move up in inflation that is persistent before we wouldconsider raising rates to address inflation.

This isgreat news for the gold bulls, as it means that the Fed will notexert any downward pressure on the gold market in the near future. The U.S.central banks sees its monetary policy as neutral now, so it will not changeits course. At least, we do not expect any moves in December.

Of course, the Fed’s ‘wait and see’ mode also means nofurther cuts in interest rates and no upward pressure on the bullion. But don’tbe deceived! The history of the Fed clearly shows that it has a dovish bias. Ifthe economy slows down next year, which is not unlikely given the inversion ofthe yield curve and theslowdown in the industrial sector and business investments, the U.S. centralbank will ease its monetarypolicy further. For the benefit of gold.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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