The Fed Effect

“Our economy is strong. Growth is running at a healthy clip. Unemployment is low, the number of people working is rising steadily, and wages are up. Inflation is low and stable. All of these are very good signs.”

These were the opening remarks from Chairman Powell’s press conference which was held yesterday afternoon following the conclusion of this month’s FOMC meeting and the release of the most current monetary policy statement from the Federal Reserve.

The policy decisions made by the Federal Reserve have a profound and direct impact and effect on all U.S. companies and citizens. It has a direct influence on corporate and small business growth, as they rely on inexpensive monetary liquidity to fund their endeavors. They have a direct effect on consumers as they will determine the cost of borrowing on everything from mortgages and auto loans to interest paid on credit card debt.

As such, the Fed continually faces a double-edged sword in which their policies will directly influence and support continued economic and job growth while keeping a growing economy from overheating.

Yesterday’s monetary policy decisions have immediate repercussions which are beginning to ripple and resonate throughout the fabric of our economy.

As expected, yesterday the Federal Reserve increased the Fed funds rate by one-quarter of a percent as part of their current monetary policy of quantitative normalization. They also maintained a transparent and consistent projection of the pace in which they will continue to raise rates.

In other words, traders and investors got precisely what they expected from the Federal Reserve. While the financial markets had factored this rate hike into current market sentiment, it was a more hawkish demeanor that the financial markets reacted to today.

One of the markets most influenced by yesterday’s monetary policy decisions was the U.S. dollar. The dollar is trading significantly higher, up almost 9/10 of a percent today and fixed at 94.60 (+0.827 points). Dollar strength provided extreme headwinds for gold and silver.

As of 5:00 PM Eastern standard time, gold futures are trading down by $12.80, which is a decline of over a full percentage point and is currently fixed at $1,186.50. Spot gold is also trading under pressure, losing $11.60 in value today and currently fixed at $1,182.50.

On closer inspection, according to the KGX (Kitco Gold Index), we can see that the vast majority of today’s price decline can be directly attributed to dollar strength which accounts for $9.10, with the remaining $2.50 a result of selling pressure.

While yesterday’s announcement of a rate increase was, for the most part, factored into market sentiment, the more hawkish demeanor of the Federal Reserve was not. As such, we will continue to see and feel the effect of their monetary policy as it becomes factored into current market sentiment.

Wishing you as always, good trading,