Have A Few Minutes?

Have A Few Minutes?

The core causes that the Fed is questing for are summed up in the minutes of the FOMC's January 28-29 meeting.

First, the Fed's systemic assessment of inflation. Make note that inflation has been running at less than 1% over the last 12 months.

"The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."

Next, the Fed backed off its more modest predictions of 6.5% unemployment as acceptable and probable. That in itself is important enough. But what makes the paragraph even more pertinent is that it sends a message to the legislative branch, in particular, to "get it together" and start governing.

"The maximum level of employment is largely determined by non-monetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 5.8 percent."

Underline and highlight this especially: The maximum level of employment is largely determined by non-monetary factors... 

We've beat this drum to death, but here goes one more time. You cannot have a robust economy if your inflation rate is 1%. Or 2%. The minimum is 2.5% and optimum is approaching 3%. 

The Fed can wish all they want on whatever star they want but that won't build a thriving economy. Of course, there is a real argument that says that inflation is already at optimum and the data we rely on is faulty, or at least outmoded.

The markets deciphered the minutes as being marginally more hawkish than the news statements released after the meeting last month. 

Besides the slipping and sliding of gold prices, U.S. equities were down on the three major exchanges by .33% to .75%. Crude continues to inch its way back up and is now fully disconnected from its traditional price pairing with gold - for the moment, anyway.

In the precious metals "headline of the week" department, the Hindu Businessline (online publication) wrote: China pips India as largest gold market. 

That is not arguable. But the India news source got the reasons all wrong, basing its analysis on a a handful of traders and gold seers. 

One of them said with a straight face:

"[The] Chinese Government's gold push can also be traced to the fact that it is looking to diversify from [the] dollar. Having secured the leadership position in driving demand, it would now look to influence prices. Even today, the price movement in the Shanghai Gold Exchange is closely watched in global markets."

China's demand is far from being a major driver of gold prices. It is not diversifying from the dollar, which it can't really because of the interconnection between the two largest economies. Also, its gold reserves are a piffle (or a pip?) in relation to their country's overall economic activity. 

Indians do have a tendency, since their economy is trifling compared to thriving economies, to read too much into gold purchasing. Gold is an instrument for trade, hedging, profit and loss, no greater or less than any other investment vehicle. It's not magically fraught with special powers.

What the analyst in India ought to be looking at is the internal debt crisis China is in, which is just now catching the attention of the financial world elsewhere.