Analyst Arkadiusz Sieroń continues his extraordinary market analysis. He begins his considerations with the following example, alluding to the hawkish tone in the FOMC minutes: During the Battle of the Black Gate in the War of the Ring, Pippin exclaimed, ‘Eagles are coming!’ It was a sign of hope for all who fought Sauron. Now, I would say hawks are coming, but that doesn’t give hope to someone struggling with downtrends in the gold market. We have prepared the market analysis of analyst Arkadiusz Sieroń with his own words for the readers ofKriptokoin.com .
How should the FOMC minutes be interpreted?
Yesterday (January 5, 2022), the FOMC released the minutes of its last meeting, held in mid-December. While the publication does not reveal any revolution in US monetary policy, it reinforces the Fed’s hawkish rhetoric. Why? First, FOMC participants agreed that inflation data is higher, more persistent, and more pervasive than previously anticipated. For example, they point to the chart below, which pruned the most extreme data and calculated by the Dallas Fed, that the clipped average PCE inflation rate reached 2.81% in November 2021, the highest level since mid-1992. It shows that inflation is not limited to a few categories, but has a broad-based character.
Committee members also highlighted a few factors that could support strong inflationary pressure this year. They cited rising housing costs and rents, more widespread wage growth from labor shortages, and longer-lasting global supply-side frictions that could be exacerbated by the emergence of the Omicron variant. In particular, supply chain bottlenecks and labor shortages are likely to last longer and be more common than previously thought, limiting businesses’ ability to meet strong demand.
Second, the FOMC acknowledged that the US labor market may be tighter than previously thought. They decided that it could reach maximum employment very soon, or that it largely succeeded, as evidenced by near-record layoffs and job vacancies, shortages of labor force and acceleration in wage growth. Many respondents agreed that labor markets will rapidly approach maximum employment if the current pace of development continues. A few respondents indicated that they already see labor market conditions largely in line with maximum employment.
The result of higher inflation and a tighter labor market will, of course, be a more hawkish monetary policy. While central bankers did not discuss the appropriate number of rate hikes, they agreed that they should raise the policy rate sooner or later.
Respondents overall indicated that, given their individual outlook on the labor market and inflation, it is warranted to raise the policy rate sooner or faster than respondents previously anticipated. .
Additionally, Fed officials discussed quantitative tightening. They generally agreed that the balance sheet flow should start closer to the policy rate hike and be faster than the previous normalization segment. Almost all respondents agreed that it would be appropriate to initiate a balance sheet runoff at some point after the initial increase in the policy rate target range. They noted that current conditions include a stronger outlook, higher inflation and a larger balance sheet, and therefore could potentially warrant a faster pace in policy rate normalization.
How will the developments affect the gold price?
What do the latest FOMC minutes mean for the gold market? Well, with one more reference to The Lord of the Rings, they seem more like the Nazgûl, which creates despair than eagles promise.
They were Falconry and therefore negative for gold fiadollaryellow. The minutes revealed that after curbing quantitative easing, the Fed may also reduce its total assets to rein in high inflation.
In December, the US central bank increased the tapering pace and signaled three rate hikes in 2022. Also, the pitch has gone further, signaling the possibility of an earlier and faster rate hike and a direct decline in the Fed’s balance sheet. Some respondents also indicated that it may be appropriate to begin shrinking the size of the Federal Reserve’s balance sheet soon after starting to raise the policy rate.
However, some participants agreed that a less supportive policy stance would likely be warranted in the future and that the Committee should make a strong commitment to address the pressures of high inflation. Therefore, the gold price reacted according to the FOMC minutes and fell from around $1,825 to $1,800 as the chart below shows. Fortunately, there is a silver lining. At least so far the drop hasn’t been huge.
Many hawks may indicate that the news is already undervalued and that sentiment is quite bullish.
But the hawks probably haven’t had the last word yet. Please note that the composition of the Committee will be more hawkish this year, but at the same time the mentality among the members has changed. For example, Minneapolis Fed Chairman Neel Kashkari, one of the most dovish members of the Committee, said this week that the US central bank will have to raise interest rates twice this year. Previously, he believed that the policy rate could stay at zero until at least 2024.
So, while inflationary risk provides support for gold, the yellow metal could find itself under hawkish fire in the coming weeks.