March FOMC Minutes And Gold

Yesterday, the minutes of the Federal Reserve’s March meeting were released. What do they say about the Fed’s stance and what do they mean for the gold market?

How can we summarize the recent FOMC minutes? First, the FOMC members agreed that the labor market had continued to strengthen and that economic activity had continued to expand at a moderate pace, while inflation had increased in recent quarters and moved close to the Committee’s 2 percent longer-run objective, but core inflation was little changed and had continued to run somewhat below 2 percent. In other words, although the headline inflation hit the target, it did not reach it on a sustained basis. Don’t ask how the Fed defines “a sustained basis”. It means that the Fed may be behind the curve, which should be positive for the yellow metal, as rising inflation not appropriately counteracted by Fed hikes lowers real interest rates. As we already know, these developments led the FOMC members (with one dissenting vote) to raise the target range for the federal funds rate to 3/4 to 1 percent.

The new thing in the recent minutes was a discussion about balance sheet normalization. The released document shows that most Fed officials believed that the U.S. central bank should start trimming its $4.5 trillion balance sheet later this year, in a gradual and predictable manner, accomplished mainly by phasing out reinvestments of principal received from those holdings.

“Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee’s reinvestment policy would likely be appropriate later this year”.

It means that the divergence between monetary policies conducted by the Fed and other major central banks could widen further later this year. Thus, the normalization of balance sheet may be positive for the U.S. dollar and negative for gold. However, the withdrawal of the Fed from the financial market could trigger some volatility, which could be beneficial for safe havens, such as gold. A lot depends on the pace of the shrinking of the Fed portfolio and the market reaction. The gradual and predictable way of trimming the balance sheet preferred by the Fed limits the risk of turmoil.