FOMC Left Policy Unchanged–FOMC Meeting

The FOMC concluded its first meeting this year and as the market had anticipated, the Fed left its policy unchanged: the Fed will continue purchasing mortgage-backed securities at a pace of $40 billion per month, and long term securities at a pace of $45 billion per month. The Fed will also keep the short term rates low until the rate of unemployment will fall below 6.5%. Gold and silver prices spiked yesterday.

From FOMC the statement:

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens”

This means that the Fed is continue with its programs until the economic situation in the U.S will shows a sharp improvement. Some members did refer to the their desire to set a date for exiting from the current QE programs, but the slow growth in the U.S economy is likely to keep this debate on the back burner for the time being.

The FOMC referred to mixed signals regarding the progress of the U.S. economy; the non-farm employment report still shows a high rate of unemployment (as of December, 7.8%) but is slowly improving; the U.S GDP contracted by 0.1% during Q4 2012; the housing market is improving.

Last month, the U.S. core inflation inched up to an annual rate of 1.9% (for the core CPI). The CPI remained at 1.7%, which is lower than the Fed’s target inflation of around 2%. The low inflation is another indication that the Fed’s policy isn’t heating up the U.S economic activity. The FOMC anticipating the inflation will remain below the 2% rate during the year but the low term inflation is likely to reach around the 2%-2.5% range. The FOMC maintains its pledge of the low interest rates at 0 to 0.25% at least until the mid of 2015. Moreover, the Fed will also maintain its low cash rate at least until the rate of unemployment will decline below 6.5% (currently the rate is at 7.8%). Tomorrow’s non-farm payroll report will reveal of any changes in the unemployment. If the number of jobs added will continue to rise around 150k this could further slowly decrease the unemployment rate.

The table below shows the bullion markets’ reactions to the news of the FOMC during 2012-2013. As seen, yesterday’s decision coincided with the sharp rise in gold and silver. Keep in mind, however, the drop in GDP in the fourth quarter – based on a report that came out yesterday – may have also contributed to yesterday’s sharp rise in bullion rates.

gold and silver and FOMC meeting effect

For further reading:

Gold and Silver Outlook for January

Gold and Silver Yearly Outlook For 2013

On the Relation between QE Programs and Gold Price

Choosing Between Gold and Silver