The February FOMC meeting was interpreted as dovish. Silver prices increased initially, only to decline the next day.
The FOMC raised interest rates by 25 basis points in its last meeting, a reduction from the 75 and 50 basis points moves seen in the previous meetings. That’s a dovish change, which is fundamentally positive for the precious metals.
However, the slowdown was widely expected and already priced in. What was new was Powell’s press conference. Let’s analyze it now. As almost always, investors could find both dovish and hawkish hints. The former include mainly Powell’s acknowledgment that disinflation has started:
I will say that it is gratifying to see the disinflationary process now getting underway (…) We can now say, I think, for the first time that the disinflationary process has started.
These remarks gained traders’ attention and made them interpret Powell’s appearance as less hawkish than in the recent press conferences, leaving the door open for a pause and later for a “pivot”. Such expectations are supportive of silver prices, although the markets could be a little too optimistic right now.
Investors Ignore Powell’s Hawkish Remarks
Indeed, the markets decided to downplay hawkish messages coming from the Fed Chair. But Powell clearly said that while the softening price pressure should be welcomed, inflation remains elevated:
And while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path (…) Although inflation has moderated recently, it remains too high.
What’s more, although the disinflation has started, it “is really at an early stage”. This is because it’s seen only in the goods sector, but not in the services sector. Hence, Powell reiterated that the Fed’s job is not done and that the U.S. central bank doesn’t plan to cut interest rates in 2023:
I do think that in this situation where we have still the highest inflation in 40 years, you know, the job is not fully done (…) If the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year, to loosen policy this year.
The fact that investors decided to ignore the Fed and detach from its forecast poses a risk of a correction in the silver market if it turns out that Powell was right and the markets were wrong.
Implications for Silver
What does the FOMC statement on monetary policy and Powell’s press conference imply for the silver market? Well, the price of silver jumped from about $23 to $23.5 after the FOMC meeting. However, the next day it practically returned to its previous level, as the chart below shows (courtesy of silverpriceforecast.com).
I would say that the fact that the markets don’t believe in Powell’s hawkish rhetoric creates some downward risk for the precious metals in a scenario in which the Fed keeps the federal funds rate at the terminal rate through the whole of 2023.
However, I think that the markets could be right in not believing in all of what Powell says. After all, the whole notion of getting back to the 2% target with a soft landing is a very bold assumption. For me, recession is likely – and when we have a recession, the Fed will cut the rates quicker than you can say “quantitative easing”. And then silver prices should shine.
Arkadiusz Sieron, PhD