On Wednesday, the Federal Reserve released not only their most recent monetary policy statement, but also updated its newest economic projections. How can they influence the gold market?
FOMC participants submitted their individual economic projections for the September meeting. Like last time, the Fed officials’ projections for the unemployment rate were essentially unchanged. They also did not practically change their forecasts for inflation and real GDP growth (but the outlook for 2016 is slightly downgraded for both metrics).
Therefore, the most important change in FOMC economic projections is that the U.S. central bankers revised down their projections for the federal funds rate, again. Although the estimate of the longer-run federal funds rate was only slightly changed (to 2.9 percent from 3 percent), for 2016 the median projection is 0.3 percentage points lower than in June (it now stands at 0.6 percent), while for 2017 and 2018 the median projections are 0.5 percentage points lower than in June (they now stand at 1.1 percent and 1.9 percent, respectively). It means that the FOMC members expect only one quarter-point rate increase this year and two rate hikes in 2017, down from their June median projection of two and three, respectively. Importantly, three Fed officials do not see any rate hikes this year. Hence, the new economic projections shows that the Fed has become more dovish, which should be welcomed by gold bulls.
The take-home message is that the Fed reduced its projections for the federal funds rate this year and in the subsequent years. Despite the fact the three FOMC members dissented in the last monetary policy meeting, the Fed’s stance – reflected by the dot plot – has become more dovish. It is positive news for the gold market, as the price of shiny metal has recently been negatively correlated with the implied fed funds target rate. Indeed, gold benefited from both December and June FOMC economic projections. However, the current market odds of interest rate hike in the last month this year are about 52 percent. It means that there is both upward and downward potential. Our bet is that December hike is likely (unless some negative economic shock occur), as the Fed will want to retain its credibility. November seems unlikely due to the presidential elections, but the U.S. central bank may signal then a hike next month. Therefore, the gold may be under downward pressure at the very end of the year.
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 aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.