Traders and investors are focusing on tomorrow's FOMC statement
The FOMCmeeting for November began today and will conclude tomorrow. Most importantly, itwill be the statement and following press conference by Chairman Powell thatwill draw the most attention. The statement will contain information about whenthe Federal Reserve will begin tapering their $120 billion monthly assetpurchases. The press conference will clarify any ambiguities found within thestatement itself.
It is highlybelieved that the Fed will announce the onset of tapering tomorrow. They havealready defined that tapering will reduce asset purchases by $15 billion eachmonth. The reduction will be composed of $10 billion of U.S. bonds and $5billion of MBS. Since the Federal Reserve has been buying $80 billion eachmonth of U.S. debt instruments, it will take a total of eight months tocomplete the tapering process.
That meansthat if they begin tapering in November, they will not complete the taperingprocess until June 2022. It is also important to note that they will not beginlift-off until they have completed tapering.
But the realquestion becomes, is the current rise in inflation transitory? The rise ininflation has reached the highest level since 2008, with the CPI-U (ConsumerPrice Index -urban) currently fixed at 5.3% as of September 30, 2021. While thecurrent inflationary rate is lower than the 6.5% reported on June 30, 2021, itis still extremely high. The Personal Consumption Expenditures Price Index (PCE)is currently fixed at 4.4% as of September 2021. This is the preferred indexthat the Federal Reserve uses; it strips out both energy and food costs.Regardless of which inflationary index you look at, we are at levels not seenin the last decade.
Concurrentlythe GDP for the third quarter of 2021 came in at 2%. Compared to the secondquarter of 2021 of 6.7%, there is no doubt that we have seen a tremendouscontraction of the economy in the United States. The Federal Reserve has beenmaintaining the idea that the rise in inflation is transitory based uponsupply-chain bottlenecks and labor shortages. However, many analysts believethat interest rate hikes will not solve the problem of supply chain shortages.If the supply chain shortage is persistent, so will the rise in inflation.
It is thatfact that has put the Federal Reserve in an extremely difficult position. Whilewe expect the Federal Reserve to announce the onset of tapering, it will bewhen they begin to normalize interest rates that will be of most interest tothe investment community. If Powell's press conference skirts around thetimeline for lift-off, it could disappoint many market participants and movegold higher.
Reuters reportedthat Carsten Fritsch, a commodities analyst at Commerzbank, said, "I expect the Fed will announcethe start of tapering but I do not see them giving a specific timing around arate hike. That may leadto some disappointment because market participants are expecting something morespecific that could push gold towards $1,800 per ounce or even beyond that."
The onlycertainty about tomorrow's FOMC conclusion is that we will see increasedvolatility as market participants attempt to read between the lines of theFederal Reserve statement and chairman Powell's press conference.
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Wishingyou, as always, good trading and good health,
By Gary WagnerContributing tokitco.com
Follow @garyswagner
gary@thegoldforecast.comwww.thegoldforecast.com