Gold price is up nearly $10 from Tuesday evening’s market open and close to $15 higher than the intraday lows, as Chairman Jerome Powell and the Federal Reserve delivered another stringently dovish set of updated economic projections following the March FOMC meeting. The stage is set, it seems, for a prolonged pause in the Fed’s cycle of rate hikes. At the same time, evidence is mounting that it’s becoming more likely that the pause will end in a rate cut rather than another hike. It’s probable that the former—and all but certain that the latter—will foster a positive environment for gold prices.
The FOMC’s announcement that short term interest rates will remain unchanged (in a range between 2.25 – 2.5%) was in step with the broad expectations of analysts. The dovish impulse that we see this afternoon’s markets reacting to is the group of downward revisions that the committee made in today’s refresh of their quarterly economic projections.
— Yahoo Finance (@YahooFinance) March 20, 2019
Of these, the most impactful is the shift-down in the median of the all-important “dot plot.” When economic projections were released in December, the median expectation of the committee was still for 2 rate hikes in 2019; and of today, officially, that median expectation in for zero hikes.
The larger shape of the market moves we have seen in the meantime in the assets most relevant to us—strong tailwinds for gold as the US Dollar and US treasury rates sell-off hard—are thanks to the differential between the Fed’s refreshed projections for the rate path and the single 2019 rate hike that had been priced into the market.
Along with the dot-plot, the FOMC also made dour revisions to their forward projections for US economic growth (predicting 2019 growth to come in at 2.1%, a full percentage point below last year,) and inflation (reducing their projection for 2019 headline inflation to 1.8%, once again short of the Fed’s 2% goal.) Given that the Fed, both as a body and as individual members in public comments, spent the weeks following the January “pause” meeting explaining that it would likely take a level of inflation that suggests the economy might be overheating for them to return to the hiking cycle, it’s this revision to lower projected inflation that now firmly roots the Fed into this dovish hold.
Relative to the updated economic projections and the message they send, the actual statement from the committee and Chairman Powell’s brief Q&A that followed were fairly uneventful. Powell acknowledged that the possible slowing in the major economies of China and the EU pose a risk to global growth over all, as well as the reality that the US economy is growing in 2019 though at a slower rate than last year.
As is often the case, it’s wise to let the dust settle on today’s news and trading before making anything beyond short-term bets on how gold markets and forex will ultimately digest this Fed meeting. Still, the fact remains: the Fed today not only re-affirmed the “patient pause” and more dovish stance that was adopted in the January meeting, but in revising down many important components of their economic projections for the year have also seriously raised the bar that will have to be cleared in order to return to the cycle of raising interest rates in the near- to medium-term.