Wednesday, 19 December, 2018

Gold pares gains after Fed minutes affirm December rate hike

Powell defends Fed charge hikes amid Trump onslaught			 0					By		Marta Subat Powell defends Fed charge hikes amid Trump onslaught 0 By Marta Subat
| 01 December, 2018, 12:56

On their face, the comments were a reversal from early last month, when Powell said the key interest rate was probably still a "long way" from a so-called neutral level and that the Fed might even tighten policy beyond that level. Last month, Mr Powell said the Fed still had a "long way" to go before it reached that equilibrium.

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY.

The Dow Jones Industrial Average rose by 618 points, or 2.5 percent, the biggest one-day gain in months. The broader index rose 2% in the year to October, and it has been at or above the Fed's 2% target every month since February. That could fall to two when officials update those forecasts at their Dec 18-19 meeting, Wrightson ICAP chief economist Lou Crandall said.

Officials voted at the meeting to hold steady their benchmark federal-funds rate in a range between 2% and 2.25%. That would bring it about to the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 percent to 3.5 percent.

The minutes said that such a change would help to convey "the Committee's flexible approach in responding to changing economic circumstances", while market supposed that this could indicate possible changes for the Fed's rate hike decisions in 2019. At best, the coming meeting could see a shift in the majority of Fed representatives surveyed from three to two rate hikes in 2019.

"We will say it again, despite the broad narrative that the Fed has gotten spooked by the equity market volatility (something Powell again refuted in his speech today), the most likely trajectory for Fed policy has not changed", Porcelli added. That is not what he said.

Speaking of the heading of Fed's monetary policy, a few policymakers expressed uncertainty about the timing of future rate increases. "If US growth slows down next year, as expected, gold would benefit from higher demand", analysts including Jeffrey Currie said in a November 26 note that endorsed bullion as one of its top 10 trade ideas for commodities.


USA stocks had enjoyed a strong rally on Wednesday after Powell said US interest rates were "just below" neutral, less than two months after saying rates were probably "a long way" from that point.

He said then that growth overseas was likely to weaken and that U.S. fiscal stimulus, which had goosed consumption, would soon fade.

He did not specifically cite the criticism he has faced from the White House, but he defended the Fed's recent moves and said "there is no preset policy path". "We know that moving too fast would risk shortening the expansion".

Higher interest rates tend to slow economic growth over time as well as pressure stock prices according to Powell. "Our path of gradual increases has been created to balance these two risks".

The Fed members' comments initially appeared to comfort investors. Investors had feared rising borrowing costs would put a damper on economic growth.

"We will be paying very close attention to what incoming economic and financial data are telling us".

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