The Federal Reserve and its monetary policy have been the topic of much debate in recent months. The central bank finally announced its plans to taper its monthly security purchases, or QE, and seems to be coming to the realization that inflation is a real problem and not simply transitory in nature. Today, Fed Chairman Jerome Powell alluded to the Fed acting quicker than expected and ending its monthly purchases at a quicker pace.
The comments from Powell sent gold from sharp gains into negative territory, while fueling a significant downturn in stocks that has seen the Dow Jones Industrial Average decline by over 600 points. Earlier this month, the Fed began tapering its monthly purchases by a $15 billion per month pace. That pace apparently may not be fast enough given economic strength and inflation risks. Although Powell’s remarks were definitely hawkish, the Fed may also be forced to weigh the potential effects of the Covid-19 variant that has begun spreading. The Fed will learn more about the variant over the next two weeks prior to its next policy meeting on December 14th and 15th.
The Fed boss did seem far more stern about his concerns over inflation, suggesting that the threat of persistently higher inflation has grown. This represents an important reversal for Powell and the Fed, who recently described inflation as being transitory in nature. Powell said the Fed would use its tools to prevent entrenchment of inflation. That would certainly seem to suggest that not only might the Fed end its QE more rapidly, but that interest rate hikes could even follow if price pressures remain.
Speaking of inflation, Powell said that higher prices currently being seen may be directly traced back to the pandemic and supply bottlenecks seen when economies were reopened. He did sound concerned, however, about the widespread increase of prices and voiced his concern over inflation being more of a long-term issue. Powell did suggest too that inflation may work itself out by the second half of next year, although he seems to be hedging his position.
A more aggressive Fed could fuel market volatility unlike what has been seen in recent years. An increasingly hawkish Fed could, for example, fuel more selling in gold and hard assets as the opportunity cost rises. Stock investors could also decide to sell, however, as markets love free money and the era of free money seems to be coming to an end. It remains unclear, however, if the outflow from equities may find its way into gold or other hard assets. As is often the case, time will tell.
The gold bulls are still hanging onto control on the daily chart by a thread. Severe declines today may negate that bullish control as the bears gain further momentum. The bulls still need to take out last week’s highs around $1853 while the bears will target $1750. Price swings and volatility may see an increase in the weeks ahead and a real trend may not make itself clear for some time yet.