The recent FOMC meeting concluded with an expected tapering of QE3 by $10 billion. This was the fifth tapering for the Fed and as a result the current asset purchase shrinks to $35 billion a month. This news, however, seems to have had a positive impact on bullion prices the next day. Moreover, the U.S dollar slightly depreciated against other leading currencies including Euro and Yen on June 19th – the following day. Was this news so dovish with another tapering of QE3?
Well, in a way – yes.
Let me explain: This FOMC press release also kept a tight lid, as in most other statements, on the future plans of the FOMC in terms of raising the interest rate. Up to now the ongoing tapering has suggested to investors the timing of a rate hike could come sooner than expected and might be as early as the end of 2014 or the end of first quarter of 2015. But this sentiment has slowly shifted direction as the minutes of the previous FOMC meeting implied there is no clear timing of a rate hike.
This time, the FOMC statement showed a rate hike isn’t likely to come to fruition any time soon:
“…the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. “
But this wasn’t the only issue: The economic outlook, as some had anticipated, was revised down from an outlook of an average of 2.9% growth in GDP in 2014 to 2.2% this year. This reduced growth rate was expected following the very low the recent report, in which the U.S GDP inched up by 0.1% in the past quarter (annual growth rate). This news doesn’t vote well for the progress of the U.S economy. This outlook along with the FOMC’s “highly accommodative stance of monetary policy” may have contributed to the recent rally in bullion prices and drop in USD.
The final nail this coffin of a rate raise is the shift in expectations by investors: Due to the ongoing recovery of the U.S labor market and the recent rise in core CPI to 2% – its highest level in a long time, investors speculated a more hawkish statement will be made by Yellen in the press conference. But she stated the core PCE is more important for the Fed rather than the core CPI.
Let’s see how the recent news and past FOMC meetings affected the direction of gold and silver.
As you can see, the FOMC’s decision seems to have had a strong positive impact on the gold and silver market. If the FOMC keeps its line of dovish statements this could be enough to slowly pull back up gold and silver.
For further reading: