Yellen’s Talk At The University Of Michigan And Gold

On Monday, Yellen gave a talk at the University of Michigan. What does it imply for the gold market?

Last week, James Bullard, St. Louis Fed President, said that there was no reason to hike interest rates in the current environment of slow economic growth and that the U.S. central bank should reduce the size of its balance sheet instead. William Dudley, New York Fed President, also argued that the Fed should shrink the balance sheet sooner rather than later. He added that the Fed may want to avoid hiking rates simultaneously with reducing its balance sheet.

This week is rather light as far as the Fed commentary is concerned. Yellen’s talk during Monday’s public discussion at the University of Michigan is likely to remain the most important event related to U.S. monetary policy. The Fed chair expressed a lot of optimism, saying: “we have a healthy economy now”. Yellen said that there was almost full employment, while inflation was “reasonably close” to the Fed’s target. She pointed out that the economy was no longer threatened by deflation and recession, unlike a few years ago, so the Fed changed its stance. Now, the U.S. central bank is likely to continue gradually hiking interest rates unless the economy begins to deteriorate:

“Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel – to give it some gas but not so much that we are pressing down hard on the accelerator – that’s a better stance of monetary policy. We want to be ahead of the curve and not behind it”.

Yellen’s comments did not affect the gold market significantly. However, on Tuesday, June rate hike expectations declined slightly from 63.1 percent to 59.1 percent. It implies that investors interpreted Yellen’s remarks as a dovish signal. We do not agree with such an interpretation, as she supported the view that more hikes were coming to avoid the overheating of the economy. Therefore, there is a downward risk for gold that the Fed will be more hawkish than expected. However, it seems that investors focus now on the geopolitical tensions rather than monetary policy, as some capital flew in the gold market as a safe haven on Tuesday morning.