Gold & Oil: The Federal Open Market Committee (FOMC) has become slightly more pessimistic on the U.S. economy as it now says economic growth has "slowed” but added there were tansitory factors, compared to March’s statement where it said that growth had “moderated somewhat.”In the statement, the central bank was also a little bit more negative on the labor market, saying "The pace of job gains moderated." However it added that their range of labor market indicators suggests that underutilization of labor resources was little changed.
The central bank has also not provide clear direction on future interest rates, simply stating, “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Looking at inflation expectations, the committee said that wage inflation remains low but long-term expectations have remained stable.
The Federal Reserve’s new outlook comes on the same day the Department of Commerce said the advance gross domestic product numbers showed that the economy only expanded by 0.2% in the first quarter of 2015, well below expectations of 1.0% growth.
Senior Kitco analyst Jim Wyckoff noted that gold prices extended their losses in the wake of the statement, falling closer to the key area at $1,200 an ounce.
Although the Fed has left open the possibility of a rate hike, economists and commodity analysts don’t think that is a likely scenario.
Andrew Grantham, senior economist at CIBC, said that there are some cracks showing in the Fed’s optimism.
“The more pessimistic assessment for growth and the labor market suggests members are further away from having that confidence than they were in March. Following today’s statement and the weak GDP figures earlier we have shifted back our forecast for the first Fed hike to September, from July previously,” he said.
Adam Button, currency analyst at Forexlive agreed that higher interest rates in June are unrealistic but the central bank is adding some uncertainty into the marketplace.
“If they wanted to signal that they weren’t going to raise rates in June they could have. The deliberately left that out of the statement,” he said.
Turning to the gold market, Button said that he would expect this statement to hurt prices in the near-term.
“Gold bulls would have loved to hear that the Fed was not raising rates in June but they didn’t get that,” he said. “I think this could cause the U.S. dollar to rebound and that will weigh on gold.”
Eric Green, head of U.S. rates and economic research at TD Securites, said the tone was the Fed was almost apologetic as it lowered acknowledged lower growth because of transitory factors. He added that the lack of “bravado” could signal the central bank is no longer in the hurry it once was to raise the fed funds rate.
“This statement does nothing to put the market on notice that a rate hike is coming, and it almost feels like this statement is paying lip service to a prevailing bias that feels a tad worn around the edges. In this regard, it feels much more dovish than expected,” he said. “For the Fed to achieve its growth objectives the economy will have to show evidence of expanding at a 3.5% to 4.0% rate over H2. Possible, but I wouldn’t want to bank on it. In June the FOMC will reduce its economic forecasts for 2015 and the median Dot will drop to only one rate hike.” |
