The FOMC Left Policy Unchanged; Gold Tumbles Down

The Fed left its policy unchanged for May. The FOMC concluded its two day meeting on May 1st. Based on the recent FOMC statement, The Fed decided to continue its asset purchase program that includes purchasing agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Fed will keep its short term rate of 0 to 0.25 percent. But earlier on the day, some analysts speculated that the Fed might decide to cut its asset purchase program from $85 billion a month to $50 billion. Alas the Fed didn’t do so.

I think that the speculation around the potential cut down in the Fed’s QE program may have contributed to the sharp drop in the prices of gold and silver on May 1st.

The table below shows the changes in the prices of gold and silver and the FOMC’s decision during 2012 and 2013.

FOMC statment and Gold Silver May 1In the past several FOMC meetings the prices of gold and silver didn’t change much or zigzagged from gain to losses. This might be the same case in this FOMC statement.

I think that eventually the Fed will start to slowdown its asset purchase program, but this may take place during the coming months.

In other news, the U.S manufacturing PMI report for April came out: the PMI fell from 51.3 in March to 50.7 in April. This means, the manufacturing sector is still growing but at a slower pace. The employment index also fell by 4pp to 50.2.

In China, the PMI also declined from 50.9 in March to 50.6 in April. These two PMI reports may have contributed to the tumble in the prices of commodities during May 1st.

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