As expected, the Federal Reserve’s FOMC this afternoon delivered a third-consecutive cut to short-term interest rates of 0.25% which, assuming it is the final of the set, ties off the committee’s “mid-cycle adjustment” of 0.75%. Chairman Jerome Powell & Co. seem to be betting on a repeat of the success that 1995’s Fed found in the same strategy which also aimed to avoid (or at least delay) the start of a recession. Based on how unconvinced many—myself included-- have been about the need for even this third cut, it seems to be working. For now.
It’s a sentiment that the committee also reflected in their end-of-meeting statement, signified by their removal of forward guidance that pointed to a quick willingness to act in support of economic growth, and replacing it with more measured language that suggests a return to the “patient” posture that the Fed held before this summer.
*FED CUTS RATES QUARTER POINT, OMITS `ACT AS APPROPRIATE' PLEDGE
*FED: UNCERTAINTIES REMAIN, WILL ASSESS APPROPRIATE RATE PATHhttps://t.co/6IzSnAP2IC
— Joe Weisenthal (@TheStalwart) October 30, 2019
The specific change was the removal of the committee’s promise to “act as appropriate to sustain the expansion” while reconfirming that future decisions about the path of the federal funds rate will be data-dependent. The statement didn’t point towards any shift in the Fed’s focus when it comes to data, nor did Chairman Powell’s post-meeting Q&A, so we’ll carry on assuming that the primary points of reference will be the path of inflation (measured by CPI as well as the “Fed’s preferred” PCE numbers,) and the health of the labor market. Also worth noting, I think, is the lack of a dissenting vote from St. Louis Fed President James Bullard. The dovish Bullard had previously dissented in favor of deeper rate cuts; that he stayed in step this time around suggests to me that even the more dovish members of the committee are comfortable holding rates steady from here. Chairman Powell said very nearly the same himself:
Fed chair Powell: We believe *monetary policy* is in a good place and current stance of policy likely to remain appropriate
Watch live ➡️https://t.co/6k1MPAz3Vi
— Bloomberg Economics (@economics) October 30, 2019
The overall tone of the FOMC’s afternoon goes a long way to explaining gold’s relatively muted response to this afternoon’s announcement. The yellow metal had been trading with little energy in the first half of the week, but this morning’s headlines have seen uncertainty growing around the US and China’s initial “phase one” trade deal, a sentiment that overtook the bullish mood from a better-than-expected first read of Q3 GDP growth and had given gold prices a lift back towards $1495/oz while the yield on US 10 year Treasuries sank back to 1.80%. While gold’s immediate reaction to the FOMC’s statement and into the start of Powell’s Q&A was to drop lower, the sell-off seemed non-committal at best and made a quick turnaround before threatening $1480. An hour after the announcement, prices were back to “unchanged” from before; in the trading since, the yellow metal has tipped back above $1495.
There really wasn’t anything for ultra-doves to grab onto in Powell’s press conference, so I don’t think the ultimately higher gold prices for the day were driven by any kind of hope in the market that we could still see more easing from the Fed in the near-term. My view is that this afternoon’s trading is driven by the reality that this exact outcome was fully priced into most major assets (including gold and the Dollar) before the sun even came up this morning, making it all, ultimately, a non-event; with another FOMC meeting behind us, the market has turned back to the narratives of growing political and economic uncertainty at home and abroad: narratives that have provided a level of support for gold and other key safe-haven assets. It’s clear that these events will remain in the Fed’s focus as well.
Highlight:“The principal risks that we’ve been monitoring have been really slowing global growth and trade policy developments, as well as muted inflation pressures,” says Jerome Powell. On Brexit: “It appears that the risk of a no deal Brexit seems to have materially declined.” pic.twitter.com/L2Rd4DE2k7
— Yahoo Finance (@YahooFinance) October 30, 2019
Turning towards the rest of the week’s economic data in light of this afternoon’s action, I think it’s very unlikely that there is any kind of “Fed reaction function” to influence gold prices in response to tomorrow’s inflation data or Friday’s jobs report. It seems virtually impossible, given the FOMC’s rhetoric today as well as the data’s performance in recent months, that inflation or the labor market could have taken an ugly enough turn last month to bring rate cuts back to the table. At the same time, Jerome Powell made it clear that it will take an unmistakable rise in inflation to spur rate hikes. With that in mind, gold’s reaction to either data set will be determined by the US Dollar’s—positive signs of a healthy US economy (steady-to-higher inflation, strong jobs market) will see the yellow metal lowered in response to a rising Greenback, while the converse data would bring about the opposite response.
Be sure to check in with our gold week recap on Friday to see how these releases turn out, and what that might tell us about the gold market heading into the end of 2019.