Was a June Rate Hike Already Factored into Gold Prices

This morning the Federal Reserve released minutes from this month’s FOMC meeting. Immediately following the release of the minutes, we saw U.S. equities moving modestly to higher ground. At the same time, we saw the U.S. dollar trading modestly lower and gold trading slightly higher.

These actions come about as a result of the Federal Reserve’s resolve to implement another interest rate hike in June. Based on the CME’s FedWatch tool, which had been forecasting around a 60% probability of an interest rate hike in June, the likelihood has moved closer to 80%.

Based on the direction financial markets moved following the release of minutes today, it appears a June interest rate hike has already been factored into the market. Gold futures, which had traded under pressure for the better part of the morning session, quickly reversed. As of 3:30 Eastern Standard Time gold futures are trading up $1.20 at $1256.60, while physical gold, which had been trading mostly unchanged, is now trading up over six dollars on the day.

The Fed Seeks Transparency in Regards to an Upcoming Stealth Rate Hike

The most interesting reveal from this morning’s minutes is the disclosure of the Federal Reserve plans to liquidate much of its balance sheet. Commonly referred to as a “stealth rate hike,” not much is known about the mechanics and structure of such a massive asset liquidation. It is called a stealth rate hike because balance sheet liquidation by the Federal Reserve would have the same net effect as the raising of interest rates.

Asset accumulation by the Federal Reserve was a direct result of the quantitative easing program implemented following the financial crisis in 2008. As such, the current assets have swelled to a value of roughly 4 ½ trillion dollars. Recently the Fed has discussed its plans to begin to liquidate these assets.

However, there has been a real lack disclosure as to how and when these assets would be sold. That all changed today as Fed minutes revealed some of the structure in the balance sheet liquidation plan. The minutes showed that this liquidation would contain “caps” or monthly units for the liquidation of balance sheet assets. Furthermore, their balance sheet plan would raise roll-off caps every three months. These minutes also revealed that the roll-off plan would only be adjusted if there were major economic changes.

While market participants and analysts gained much needed information about the structure and scope of the upcoming balance sheet liquidations by the Fed, there are still key elements which require more understanding. Given that the Federal Reserve’s balance sheet contains roughly 1/3 of the entire inventory of bonds directly tied to mortgages in its $4.5 trillion worth of holdings, the effects of a massive liquidation by the Fed cannot be underestimated.

Wishing you as always, good trading,