At the end of another Fed day, this one including a quarterly update of the Staff Economic Projections, gold prices are solidly higher, up roughly $13 from Tuesday’s closing levels as the committee left short-term borrowing rates unchanged for now but appear to have opened a wide door for a rate cut in the near-to-medium future.
If we’re all being honest, I think we were all expected a bit more fireworks on the price chart for gold given that Fed Chairman Jerome Powell and the FOMC had a particularly tight needle to thread as recent macroeconomic data hasn’t deteriorated enough to warrant the interest rate cut that the market is so sure looms just around the corner.
After an initial rip higher on the dovish shift set out by the FOMC statement at 2pm EDT this afternoon, gold prices have spent the remainder of the afternoon trading in a sideways chop just above $1350 which may well set up as a new line of support, should it hold through the opening of Asian trading later this evening. It looks likely enough to do so, as we head into the day’s global market close near $1360/oz.
Before we all head home for the day, let’s take a brief look at the most relevant updates to the usual components of this quarterly FOMC meeting: the statement, the updated Staff Economic Projections, and Chairman Powell’s press conference.
The committee’s statement did most of the heavy lifting this time around in terms of establishing the adjustments the Fed is making to its outlook for the US economy. While the committee says they still anticipate a strong labor market through this year and for 2019 inflation to come in close to the Fed’s 2% target—“close to,” we’ll come back to that shortly—they did alter their language to admit that “uncertainties about this outlook have increased.”
“In light of these uncertainties and muted inflation pressures,” the FOMC’s statement affirms that they “will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.” This statement, along with the removal of the reference to being “patient” with regards to the current rate environment, is what investors will be pointing to for the next month as the evidence that lower interest rates are coming in July.
While it should be noted that despite market fervor the majority of economists and analysts will likely set their expectations for-- at the earliest-- a December rate cut, it’s safe to assume that this afternoons influx of gold-buying is driven directly by market euphoria for a (still very theoretical) reduction of interest rates in the next 30 days.
The Updated Economic Projections
First, let’s talk about that call for inflation “close to [2%]” for 2019. Why the committee’s statement seems to be putting on the brave, positive face about it, the updated economic projections now call for PCE, the Fed’s preferred measure of inflation, for 2019 to come in at just 1.5%, down from 1.8% in the March projection. It’s certainly hard to argue with that view, given the most recent inflation data.
The other important—or, at least headline-grabbing—piece of the Staff Economic Projections this time around was of course the anonymous dot plot.
The Federal Reserve’s so-called dot plot, which the U.S. central bank uses to signal its outlook for the path of interest rates, shows that policy makers are divided on policy for the remainder of this year, a change from no hikes in Marchhttps://t.co/RV28rVqxXg
— Bloomberg Markets (@markets) June 19, 2019
The Fed’s visualization of individual committee members’ expectations for the path of monetary policy now shows that 8 of the 17 FOMC participants expect at least one rate cut this year, a sharp increase for the zero in March. Under the heading of “interesting, if not instructive”, we know that at least one of those anonymous dots is St Louis Fed President James Bullard who today was a singular dissenter from the rest of the committee in voting for a 25 basis point cut—the first such dissent under Chairman Powell.
The Press Conference
The press conference was relatively dull, and mostly saw Chairman Powell reiterating the comments in the statement while also adamantly reaffirming that no decision to cut rates has actually be made just yet. There was really only one remark of interest in the Q&A, and it’s one we’ll probably see mentioned several more times this week:
Highlight: Fed Chair Jerome Powell on Trump’s tweets about demoting him: “I think the law is clear that I have a 4-year term, and I fully intend to serve it.” pic.twitter.com/mqfbXvxzHc
— Yahoo Finance (@YahooFinance) June 19, 2019
To editorialize just a bit: amid an increasingly damaging trade war with China likely doesn’t get resolved in Japan next week, I do not think this is a fight that the Trump team wants. The market response to that kind of upheaval alone would put a serious dent in any sitting president’s reelection efforts.
As we head into the market close and US-based traders prepare to hand the reigns over to the Asia session, we’ll be looking to see how Thursday’s Asian and European sessions digest this Fed day.