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By: Rhona O'Connell, Head of Market Analysis
The Fed and Gold: - sell the rumour, buy the fact
Compared with the September economic projections, the Committee is understandably more bullish on the economy; see the table below, in which the median forecasts for real GDP have been raised to 4.0% from 3.8% (but then lower projections for 2023); unemployment now projected at 3.5% next year and beyond down from 2022 at 3.8% in September. Core PCE inflation projected at 2.7% next year from 2.3% previously.
Full tables are here
Now for the dot plot: -
September December
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The consensus for December points to three rate hikes next year and a possible three or four more in 2023.
In his Press conference Jay Powell said that “Notwithstanding the effects of the virus and supply constraints, FOMC participants continue to foresee rapid growth; as shown in our Summary of Economic Projections, the median projection for real GDP growth stands at 5.5 percent this year and 4 percent next year” and that the economy is making “rapid progress towards maximum employment; also that how long the labour shortages will persist is unclear, particularly if additional waves of the virus occur.
With respect to inflation, he noted that “While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services. Wages have also risen briskly, but thus far, wage growth has not been a major contributor to the elevated levels of inflation. We are attentive to the risks that persistent real wage growth in excess of productivity could put upward pressure on inflation. Like most forecasters, we continue to expect inflation to decline to levels closer to our 2% longer-run goal by the end of next year. The median inflation projection of FOMC participants falls from 5.3% this year to 2.6% next year; this trajectory is notably higher that projected in September”
Asked about maximum employment and when it might be reached, he said that it includes a broad range of parameters; unemployment itself, participation rate, job openings., wages, flows in and out of the labour force; also broadly and inclusively at different demographic members of the labour force (and the Statement notes that the gap is narrowing between different ethnic groups). Assessing maximum employment is this a judgment call, not just a headline number.
And finally…
With the FOMC only fractionally more hawkish than the markets had been expecting, gold took the results in its stride. After a quick dip on the release, accompanied by a short spike in the dollar, gold started improving and the dollar resumed its downward path. Some observers are arguing for further dollar strength next year. It is also arguable that the dollar has already been pricing in at least two rate hikes next year and that some emerging market economies will benefit from commodity price improvements as well as economic recovery. Tie this in with the search for yield and diversification, coupled with the possibility of an improvement in the euro, and a case can be made for the dollar’s bull run to start tapering off.
Gold and the dollar, three-day view
Source: Bloomberg, StoneX
December
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