If you have decided to buy gold bullion or to buy silver coins in the last few months then you may have been delighted with how last night’s Fed press conference went.
If you’re still wondering if or how to invest in gold then it might be worth paying attention to what central banks are doing in the coming weeks. After all, how do central banks make their decisions when it comes to monetary policy? In years before it might have been quite straightforward to answer that question – they look at inflation rates, they look at market indicators, they look at data from statistical agencies and then they decide what to do with interest rates.
But, yesterday US Fed Chair Jerome Powell seemed intent on adding some cloak and dagger to the situation and in doing so he just made it look like the Fed are not really sure what they think or where to go now. Of course, there’s nothing gold and silver prices love more than an incompetent central banker but especially one that basically admits that they aren’t sure they’ve got any of this right in the first place.
The Federal Reserve raised the fed funds rate by the expected .75% at their two-day meeting that ended on July 27, the statement was much as expected. The opening of the statement acknowledges that economic indicators for spending and production have softened. But still, the unemployment rate remains very low while inflation remains very high.
However, the message in the press conference message was very muddled.
The longer Chair Powell spoke during the press conference the more gold and silver rallied on his ambiguous message.
Chair Powell said that they won’t provide guidance for more than one meeting at a time. They have no idea what the rates will be next year. He added that even in the best of times the projection of rates is uncertain, but projections today are even more unreliable since these are extraordinary times.
When asked by reporters to clarify on the outlook Chair Powell kept referring to the Summary of Economic Projections that was released with the June Federal Reserve statement which points to the Fed Funds rate at 3.4% by year-end. But then he repeated that economic activity has come in weaker than anticipated; which should mean June projections are too stale now.
So no one really knows what he is trying to say. June is now a long time ago. The economy is weakening since June. Does he want us to just trust that those June projections will be accurate … despite him stating earlier those projections are worthless? Or does he not have any more clever ideas about the way forward so his only talking point is to default to old ideas?
In regard to the weaker economic activity, Powell stated that he does not think the US is in a recession … and still thinks that he can achieve a path of rate increases that do not lead to recession.
A Conference full of Flaws
Asking about the negative GDP data in Q1 and that data and models (including the Atlanta Fed’s GDP model) are suggesting Q2 could also be negative, Chair Powell said that GDP data can’t be trusted! If the data from other U.S. government statistical agencies can’t be trusted, then what is the Fed basing its forecasts and policy decisions on?
Maybe he decided to follow President Biden’s declaration. Which is there is no recession happening now and there won’t be one in the U.S.
If GDP data calculated and released by the U.S. Bureau of Economic Analysis (BEA) can’t be trusted, then how can the Fed’s preferred measure of inflation? The PCE Index (Personal Consumption Expenditures), which is calculated by the same agency be trusted?
This press conference had so many flaws of logic that maybe, just maybe, the mainstream media will begin to doubt the Fed and its central banking friends are infallible!
Chair Powell stated several times that the Fed focuses on bringing inflation down to 2% measured by the PCE index. The Fed has little control over the supply side of the equation. Also, the shortages are caused by supply problems from China, the Russia/Ukraine war, etc. The Fed aims to achieve lower inflation by stifling demand through tighter monetary policy.
Did he really mean to say that Russia’s war affected supply chains therefore interest rates must go up to shrink the economy? Even if he did not mean it, that is what he said. Did Russia just become the de facto controller of the US economy? (side-note: Check out episode two of The M3 Report for more on this)
It seems that the Fed has lost its ability to focus on more than one specific indicator at a time. Remember last year when inflation was rising quickly, they stuck to the stance that inflation was “transitory”, and they didn’t need to react? Yet now they are raising rates at a quick clip to try and combat that inflation. Even though other indicators are already showing an economic slowdown.
Furthermore, inflation data is a lagging indicator. The latest PCE index numbers are for May and the latest CPI data is from June. The decline in commodity prices and the already indicated slowdown in economic activity (which leads to less spending) will filter through the economy and compound the Fed’s tightening.
The Fed to Tackle Inflation with Rate Increase?
Last summer the message from the Fed was that inflation was transitory, and they did not react to any of the indicators that showed otherwise. Now the Fed is frantically trying to catch up on that error.
This summer the message from the Fed is that the U.S. is not in a recession. Also, its focus is solely on bringing inflation down to its 2% goal. (We remind readers a 2% goal was set on a fluke. See Did Central Banks Arrive at their Target Inflation Rate by Mere Fluke?
The one glimpse of forward guidance that Chair Powell did provide was:
Now that we’re at neutral, as the process goes on, at some point, it will be appropriate to slow down. And we haven’t made a decision when that point is, but intuitively that makes sense. We’ve been front-end loading these very large rate increases. Now we’re getting closer to where we need to be.
Chair Powell was very ambiguous on the question of whether the risk of raising rates too much was the bigger risk for the economy at the current time.
Our view is that the giant risk is that the Fed will do too much tightening. This means next summer the Fed will cut rates because the economy is too weak.
The rally in gold and silver prices during the press conference, along with the declining longer-term bond yields tell us that those markets agree!
From The Trading Desk
The Fed raised rates by another 75 basis points yesterday, which was expected. What was interesting was the USD sold off and gold and silver popped.
With the USD easing back off its recent highs, is the market starting to price in that we maybe at cycle top in rates for now or one more 25bp hike in September.
With the 75bp rate hike yesterday, the Fed has rates now where they were in 2018 before the Fed caved in.
The only difference this time around is there is an additional USD 9 trillion in debt added since then.
Last week the US PMI Composite index numbers were released, for June this was down to 47.5 from the 52.7 reading.
The expectation was a small decline to 52.3. A reading below 50 means recession. Later today we get the latest GDP numbers, which should confirm this with 2 quarterly readings of slowing GDP.
However, watch out for the spin as policymakers and the white house try to change the narrative and the definition of a recession!
Gold is off its recent lows, it had a nice move up yesterday and a move about $1,750 psychological barrier is what we are looking for.
Near-term support is at $1730 with the $1,700 level as a key support level that it needs to hold.
Gold is oversold at these levels, however, stock availability is good and premiums remain low, $ cost averaging in at these levels is worth considering.
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GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
27-07-2022 1723.95 1714.05 1427.95 1422.32 1699.47 1690.57
26-07-2022 1719.85 1720.05 1431.60 1431.08 1688.72 1695.45
25-07-2022 1731.95 1718.90 1437.69 1424.11 1690.90 1677.30
22-07-2022 1725.00 1736.95 1443.31 1442.19 1699.30 1696.31
21-07-2022 1686.55 1705.10 1413.50 1428.36 1657.37 1669.80
20-07-2022 1712.65 1709.30 1423.90 1426.41 1671.89 1672.89
19-07-2022 1712.95 1713.05 1426.37 1425.77 1674.58 1673.14
18-07-2022 1723.65 1719.05 1442.01 1432.48 1699.00 1692.40
15-07-2022 1702.55 1706.15 1439.85 1438.63 1696.08 1693.87
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