Gold prices were effectively unchanged this afternoon in the wake of the latest release of discussion minutes from the FOMC; the minutes and notes confirmed the market’s general assessment of a very divided Fed with regards to the rate path forward. Gold spot prices have closed Wednesday’s trading at $1505.40/oz, while silver prices closed just above $17.70.
— Yahoo Finance (@YahooFinance) October 9, 2019
Notes on the FOMC’s discussion which resulted in a second consecutive 0.25% cut to short term interest rates in September establish three distinct camps within the Fed: those who felt that there is more easing needed to fend off a nearing recession, those who supported September’s cut but now believe the committee should hold rates steady, and those who believed even a second quarter-point of easing was too aggressive in light of decent data on the US labor market and inflation.
My three biggest takeaways from the minutes are as follows:
- Several committee members mentioned that their models were showing a marked increase in the odds of a recession hitting the US economy “in the medium term."
- The committee as a whole seems to still believe that the key drivers of that recession threat are still outside of the routine mechanics of the US economy; that is: geopolitical risk, economic weakness outside the US and (of course,) trade tensions.
- Surprisingly, there were some mentions of concerns over inflation (not at present, but longer term) convincing some members to support September’s cut.
These three points taken together say to me that, while headline risk and developments around the US-China trade war (or any other that Donald Trump kicks off) will have a bigger impact on the FOMC’s thinking in the near-term than will individual reads of macroeconomic data, the key exception will be price inflation: the markets’ favorite (CPI, due Thursday) and the Fed’s (PCE.) With the poor performance we saw from the PPI version on Tuesday, I do think there’s some added sensitivity for gold prices around Thursday’s upcoming release of CPI for September.
Even if there is a small hiccup in last month’s inflation numbers, and even though the market is still aggressively pricing the odds of another rate cut at the Fed’s next meeting, I think the three-way split within the committee means that the toughest hill to climb belongs to those members like James Bullard who support further easing in October. There are simply more voters that need to be convinced to act, whereas if improved (or, at least, not-deteriorating) data over the next few weeks turns even one of Bullard’s camp to flip, then another “Fed pause” would seem like a lock.