November FOMC minutes were interpreted as dovish, which improved the gold price outlook.
On November 23, 2022, the FOMC published minutes from its last meeting at the beginning of November .
As always, investors awaited the minutes as they could contain new clues on the Fed’s future monetary policy . The document doesn’t offer any revolutionary surprises and includes both hawkish and dovish parts.
On the hawkish side, the Fed’s staff raised their projection for inflation in the coming quarters, in which it will reach the 2-percent target only in 2025. Also, FOMC participants observed that recent inflation had been higher and more persistent than anticipated. Thus, inflation will persist for longer than previously thought , and the risks to the inflation outlook remain tilted to the upside. What’s more, there are very few signs indicating waning inflation pressures , so the needed terminal level of the federal funds rate is higher than earlier expected:
various participants noted that, with inflation showing little sign thus far of abating, and with supply and demand imbalances in the economy persisting, their assessment of the ultimate level of the federal funds rate that would be necessary to achieve the Committee's goals was somewhat higher than they had previously expected
All these factors should require more hawkish actions , especially given that the labor market remains very tight. Hence, participants “continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate in order to attain a sufficiently restrictive stance of policy to bring inflation down over time”
Dovish Signals in the Minutes
On the dovish side, the Fed’s staff openly stated that the probability of recession is as high as the baseline projection:
the staff, therefore, continued to judge that the risks to the baseline projection for real activity were skewed to the downside and viewed the possibility that the economy would enter a recession sometime over the next year as almost as likely as the baseline.
Additionally, the FOMC members decided that it would be good to slow the pace of increase in the target range for the federal funds rate :
a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability.
Implications for Gold
What does it all mean for the gold price outlook? Well, the ultimate level of the federal funds rate will be higher, but the pace of hikes will be slower. Traders decided that, on balance, the November FOMC minutes were tilted to the dovish side. This is why the price of gold increased to above $1,750 after the release of the minutes and continued the upward move the next day, as the chart below shows.
The conclusion is clear: although the ultimate peak of the federal funds rate in this tightening cycle could be a bit higher than previously expected, the Fed will slow the pace of hikes. It means that the US central banks will become less hawkish and that the Fed’s pivot is approaching quickly. This is – combined with a likely recession next year – fundamentally positive news for gold prices.
Arkadiusz Sieron, PhD