After hefty corrections throughout yesterday’s session, gold is trading up again in the face of multiple statements made by Federal Reserve in both voting and non-voting positions. Today Fed officials spoke on a number of topics to grant insight into future monetary policy and the state of the US economy, with volatility observed in US futures and treasury yields as well as gold.
- New York Fed President stated that further rate hikes are not necessary at this time.
- Brexit and the trade war have been confirmed as major factors influencing Fed policy.
- Fed Vice-Chairman Richard Clarida stated that the Fed is close enough to its economic goals that it can and should step back and observe in order to inform future strategy.
- The Fed may adjust its methods of communicating policy changes.
- Broadly speaking, Fed officials stated that the economy is healthy and not in need of a heavy-handed policy approach from the central bank.
Determining Policy - Atlanta Fed President Raphael Bostic
Getting things started, Atlanta Fed President Raphael Bostic shed some light today on the “clouding” factors which influence policymakers’ decisions, citing global trade and Brexit as two major influences.
While this has been the common opinion of market analysts, having it confirmed by a Fed President helps solidify the impact these factors have on policy and will lend more weight to future market analysis of developments with the trade war and Brexit from here on out.
Rate Hikes Unnecessary - New York Fed President John Williams
New York Fed President John Williams recently stated that he was comfortable with the level of US interest rates and doesn’t see the need to raise them further given the current economic conditions, although growth and inflation are two factors which could influence a policy change in that area. He stressed that it was important to remain vigilant whether rates were on the high or low end.
“Monetary policy is where it should be,” he said. “It’s around my view of what neutral interest rates are.”
Asked about what it would take to change his outlook, he said “I don’t think that it would take a big change, but it would be a different outlook either for growth or inflation” to return to hiking rates.
Williams Warns of Low Inflation Risks
Stating that rates were now consistent with what he considered a lower “neutral” level, Williams stated that rates were, in fact, slightly weaker than he would aim for due to growth and unemployment leveling off.
“We have seen some worrying signs of a deterioration of measures of longer-run inflation expectations in recent years,” Williams said Friday in a speech in New York. “The risk of the inflation expectations anchor slipping toward shore calls for a reassessment of the dominant inflation targeting framework.”
Williams’ remarks add more strength to the comments made by the central banks earlier in the month suggesting that rate hikes would be put on hold for the mid-term under the current economic conditions. He went on to state that balance sheet roll-off could end if bank reserves were to reach “maybe $1 trillion of reserves or somewhat more than that.” Reserves are currently at around $400 billion.
Williams stated that the $1 trillion estimate is “a guess today of the amount of reserves that will be held in the system in the future - but again we are learning and will get a finer touch on that.” Williams is a key decision-maker and the vice-chairman of the FOMC who votes at each rate-setting meeting.
Time to Re-Assess Fed Strategy - FOMC Vice Chairman Richard Clarida
Richard Clarida stated that the low interest rates and low inflation posed an opportunity for the Fed to re-examine its methods or pursuing the goals assigned by Congress, specifically balancing employment and price stability.
“In light of the unprecedented events of the past decade, we believe it is a good time to step back and assess whether, and in what possible ways, we can refine our strategy, tools and communication practices,” Clarida said earlier today.
“It makes sense for us to remain open minded as we assess current practices and consider ideas that could potentially enhance our ability to deliver on the goals the Congress has assigned us.”
ITS DEFLATION FOLKS NOT INFLATION : "Central banks are generally
believed to have effective tools for preventing persistent inflation
overshoots, but effective lower bound on interest rates makes persistent
undershoots more likely,” -Federal Reserve Vice Chairman Richard Clarida
— Tim Seymour (@timseymour) February 22, 2019
Clarida added that “by conducting this review, we want to ensure that we are well positioned to continue to meet our statutory goals in coming years.” He also hinted that the Fed is aware of criticisms regarding its opaque channels of communication regarding policy and analysis, stating that the Fed may review and change the way in which it communicates with the world for greater clarity on policy.
Clarida stated that low interest rates could last for years due to population aging and increased risk aversion. Overall, his comments are reminiscent of Fed Chairman Jerome Powell, essentially stating that conditions are favorable enough that the Fed can take a step back and observe the effects of its policy from a greater distance in order to refine strategy for the future.
Balance Sheet Reduction Should Move Slowly - FOMC Vice Chairman Randal Quarles, Philadelphia Fed President Patrick Harker
Randal Quarles stated that the balance sheet reduction program and would be re-evaluated if it was seen to create problems, confirming that the Fed is prepared to change policy if necessary and that the central bank’s main goals are still to foster full employment and healthy inflation.
“The normalization of the balance sheet is not a competing goal,” said Quarles at the Chicago Booth U.S. Monetary Policy Forum in New York. “If ever it appears that our plans for the balance sheet are running counter to the achievement of our dual-mandate objectives, we would quickly reassess our approach to the balance sheet.”
“It is probably safe to say that reserve demand is much higher than before the crisis,” he said. “With so much uncertainty over the level and slope of the reserve demand curve, a degree of caution is warranted.”
Fed officials indicated in the most recent FOMC meeting that balance sheet roll-off should come to an end before the year is out, with the final level likely in the range of $3.5 trillion.
President Patrick Harker discussed unwinding the Fed’s balance sheet in today's speech. In his view, “a slow and steady approach is not only the safer option, it’s one that will reduce uncertainty about the evolution of the balance sheet.” Read: https://t.co/mADq5Ew20k #USMPF pic.twitter.com/f8NaaPi4qs
— Philadelphia Fed (@philadelphiafed) February 22, 2019
Philadelphia Fed President Patrick Harker supported this cautious approach, stating that the Fed should move slowly in order to prevent reducing the levels of reserves lower than what is necessary.
“I have proposed that we can substantially slow the decline in reserves by ending the reduction in asset holdings later this year,” Philadelphia Fed President Patrick Harker said in remarks prepared for delivery to a monetary policy conference in New York.
“Reserves would then diminish at a very gradual pace, reflecting the trend growth of other Federal Reserve liabilities.”
Balance Sheet Reduction Won’t Have Major Impact - St. Louis Fed President James Bullard
James Bullard made a series of statements on Thursday and Friday regarding the Fed’s policy toward balance sheet reduction, stating that the central bank is most likely nearing the end of rate hikes and the balance sheet reduction program.
“I think the message from my point of view is the normalization process in the United States is coming to an end,” he said on Thursday. Bullard stated that he believes rates are too high, a view not shared by most other policymakers.
“I thought at the December meeting, myself I thought it was a step too far. I argued against that move,” Bullard said. “We did get a bad reaction in financial markets. I think the market started to think we were too hawkish, might cause a recession.”
“I think all of this weighed on the committee and got people to change their thinking,” he added.
Bullard: With the policy rate near zero, the effects of QE may have been substantial due to signaling effects. Now, with the policy rate well above zero, any signaling effects from balance sheet changes have dissipated https://t.co/0aXyGtq46C pic.twitter.com/FTZzc69CfB
— St. Louis Fed (@stlouisfed) February 22, 2019
On Friday Bullard stated that the conditions in which the Federal Reserve’s quantitative easing policy made a significant impact on the economy have changed, saying that the policy may no longer have a significant effect on the current macro economy.
“With the policy rate near zero, the effects of QE may have been substantial due to signaling effects,” he said. He pointed out that the FOMC normalized the policy rate to a considerable extent during 2017 and 2018. “Now, with the policy rate well above zero, any signaling effects from balance sheet changes have dissipated,” Bullard added.
This means quantitative tightening does not have equal and opposite effects from quantitative easing, he pointed out. “Indeed, one may view the effects of unwinding the balance sheet as relatively minor,” he said.
Gold has ticked upward today after recent corrections, with volatility ongoing in today’s session which has seen a high of $1,332.94 and a low of $1,322.12. Spot gold last traded up 0.35% at $1,328.18/oz.
The statements made by the Federal Reserve broadly point to the economy being in a good place, signaling no rate hikes and low inflation for the foreseeable future as well as indicating that the reduction of the Fed balance sheet is neither a priority nor a done deal. All of these statements have significant implications for the financial markets, suggesting that the USD is unlikely to be subject to loss of value through excessive inflation.