Over the last few days, the two most important people in the world held press conferences. What did they say and how can these remarks affect the gold market?
Powell Faces Difficult Questions
On Wednesday, Powell held a press conference. We have already analyzed the latest FOMC statement and the dot-plot, but there was not enough room to discuss Powell’s answers to journalists’ questions. Let’s do it today.
Steve Liesman from the CNBC asked a good question why the Fed thinks that the interest rates will be above neutral in 2020 and 2021. Powell did not know what to say, so he replied that “some of the participants have mostly very modest overshoots of their personal estimates of neutral”. We bet that there is just a need to return to a more normal level of interest rates, partially to have some ammunition when the next crisis hits. Anyway, whatever the reason, when the actual federal funds rate will be higher than the estimated neutral level, the monetary policy would turn into restrictive. The hawkish stance will not help the gold prices – unless it triggers, after some lag, the next recession.
Howard Schneider from Reuters also had an interesting question. He asked about the flat Philips curve. And Powell again couldn’t give a satisfactory answer. He just said that “the inflation process has changed dramatically,” but it is not an answer – this is exactly something that needs an explanation. OK, Powell also mentioned anchored inflation expectations, but it did not sound convincing. Anyway, the lack of inflationary response to very low unemployment level is bearish for gold prices. The yellow metal loves high and rising inflation – not a stable level around the Fed’s target.
Michael McKee from Bloomberg Radio and Television noted that financial conditions are still extremely loose despite the Fed’s tightening cycle. We pointed out this feature of the US current economy many times, arguing that this is one of the main reasons why the interest rate hikes do not have to lead to an immediate recession. Gold bulls should remember about this and acknowledge the fact that, as Powell admitted, the Fed does not fully control the financial conditions.
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