The FOMC Tapers QE3 Again – Gold and Silver Fall

As many had expected the FOMC decided to taper again its asset purchase program, AKA QE3, from $65 billion a month to $55 billion a month. This is the first major decision taken under new Chair Janet Yellen. This decision is in line with the FOMC’s monetary policy of the past several months, in which it is slowly getting out of the asset purchase program. The slight improvement in the labor market – the rate of unemployment declined to 6.7% – enabled the FOMC to cut further QE3. Nonetheless, the U.S economy isn’t out of the woods and the inflation rate is still well below the FOMC’s target of 2%. This is why, the FOMC is likely to maintain its policy in the near future and keep its low interest rate. As stated in the FOMC’s press release:

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.”

Nonetheless, the FOMC’s decision as to when it will be prudent to start raising the interest rate will mostly rely on the progress of the labor market and price stability:

“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”

The FOMC also updated its economic outlook in which the GDP growth rate was revised down to 2.1%-3% in 2014; the rate of unemployment inched down to a range of 6%-6.5%; the inflation outlook is still low at 1.3%-1.8% – below the FOMC’s target of 2%.

The markets promptly reacted to the news as the USD appreciated against the Euro, Canadian dollar and Aussie dollar. Furthermore, in the commodities markets gold and silver dropped soon after this decision was made.

The table below shows the reaction of the precious metals markets to the recent FOMC decision and past decisions.

FOMC statment and Gold Silver March 20

As you can see, the FOMC’s tapering decisions in the past three meeting resulted in a sharp fall in the prices of gold and silver.

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