FOMC Minutes Pull Rug Out from Under Gold

The wait for and the actual release of the Fed minutes from the April FOMC meeting has been steering the ship of finance as of late and definitely throughout today’s sessions. Gold has been particularly sensitive to the fears surrounding the perceived hawkish mood at the Fed.

Gold is down today approximately $22.50 at 2:30 Eastern Time. About 0.40% of that is due to dollar strength. The greenback is up against all major currencies except the British pound. The buck is up almost 0.90% against the euro, the other half of the pair that helps to determine gold prices.

U.S. equities are down because of the rate-hike jitters but they have come back some in midafternoon. At one point the Dow was off 100 points. It will be closing practically even. The S&P is will also close even. NASDAQ, shuttled between gain and loss for most of the day but will close about half a percent higher.

West Texas Intermediate fell 1.00%, mostly due to dollar strength but there was a whiff of profit taking that we are guessing will resume once markets open again tonight in Asia.

The details of the minutes’ jibe with what most people perceived as the general economic conditions in the U.S. economy. Like most forecasts, though, the future of the economy seems a little less clear, but in a nutshell, it seems that the world’s biggest economy will continue on the same trajectory. That is, if there are no major disruptions in international affairs, in other large economies such as Europe and China, or in supplies of vital commodities.

Some markets are interpreting the minutes as hawkish. We think that is reactionary and markets will reverse course on that sentiment by the weekend or next Monday at latest. If you read the minutes closely it appears that only two committee members are carping about higher rates. It is a ten-person committee. To get a majority, four more members would have to agree to policy change. Yellen and the New York-leaning members show no intention of letting that happen – at least right now.

We have been saying for some time that the hawkish dissenters on the Federal Open Market Committee are ideologically driven. We stand by that and refine it to include “standard benchmarks” that cite past levels of interest rates as if former economic dynamics are specifically relevant. Let’s look at the minutes themselves:

“Two participants noted that several standard policy benchmarks, such as a number of interest rate rules and some measures of the equilibrium real interest rate, continued to imply values for the federal funds rate well above the current target range. Such large and persistent deviations of the federal funds rate from these benchmarks, in their view, posed a risk that the removal of policy accommodation was proceeding too slowly and that the Committee might, in the future, find it necessary to raise the federal funds rate quickly to combat inflation pressures, potentially unduly disrupting economic or financial activity. Overly accommodative policy could also induce imprudent risk-taking in financial markets,

posing additional risks to achieving the Committee’s goals in the future.”

There also seems to have been some disagreement over the downside risks to the global economy and the general health of nations.

There are some bullet points we have quickly pulled out of the minutes thus far:

• Inflation is running below the target of 2%
• They noted that growth in household spending had moderated
• Households’ real income had risen at a solid rate
• Consumer sentiment had remained high
• The housing sector improved further
• Business fixed investment and net exports had been soft

A final look at the general Fed philosophy can be found in this part of the minutes:

“Regarding the possibility of adjustments in the stance of policy at the next meeting, members generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook.”

Link to the full minutes here: https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20160427.pdf

Wishing you as always, good trading,