The Fed, as expected, raise rates by 25 basis points to 0.75 to 1 percent. This wasn’t a surprise. But the FOMC didn’t revise its dot plot and left as members still expect only two more hikes this year. The FOMC also didn’t make any major changes to the U.S. economic data. This was enough to be considered by the markets as a dovish hike as LT yields plummeted, gold and silver prices bounced back and even equities recovered. What’s next?
Now that the FOMC rate decision is behind us, the markets could return to focus on the political uncertainty surrounding Europe – mainly the French elections – and how the U.S. presidential administration is shaping up. But don’t get me wrong, the markets will still try to figure out what the Fed is likely to do and get its hints from the speeches of FOMC officials – and this week several members including Evans, Dudley, Kashkari and Kaplan will talk this week; and Chair Yellen will also deliver opening remarks at the Federal Reserve System Community Development Research Conference, in Washington DC on Thursday. But at this point the markets will focus, as usual, as the data and examine if there is any reason for concern about the progress of the US economy. I recommend reading Neel Kashkari’s article about his decision for dissenting in the recent meeting. Basically, he argues that the economic data don’t support raising rates and the Fed shouldn’t raise rates until they see the whites in inflation’s eyes. But for now the markets are pricing in around 3 hikes this year – the same as the FOMC; the implied probability for a June hike is 58% as of Monday; and a December hike is at 91% and two hikes by then at 61%.
What does it mean for gold and silver?
The near term reaction for bullion was upward pressure on prices as indicated in the following table
Source: FOMC and Bloomberg
But moving forward this could be a short-lived boost: Yields dropped following the rate decision and currently stand around 2.5 for the 10-year treasury bonds – basically around the levels recorded before the week of the FOMC rate decision. The recent boost to bonds helped push back up gold and silver prices but now the focus will be back on the U.S. economy and political unrest – domestic and foreign; this unease could serve well the demand for precious metals but if the USD could still resume its upward trend, which may impede the progress of gold and silver. And LT U.S. treasury yields are still likely to resume their upward trend as the markets expects higher short term rates due to the Fed’s expected hikes.
So, unless the U.S. economic data show some signs of slowdown or the unrest in Europe diminishes, gold and silver are still likely to suffer.
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