The U.S. Federal Reserve announced today that it plans to keep its foot on the gas pedal, maintaining its current rate policy along with its monthly security purchases. The central bank did, however, allude to tapering back its support in the months ahead if the economy continues to strengthen.
The Fed will keep the key interest rate at 0-.25% while it also continues to purchase $120 billion per month in securities. The Fed’s post meeting announcement, however, suggested the central bank could potentially look to dial back stimulus measures sooner than anticipated if the economy shows further improvement. The Fed stated it believes the economy has made improvements towards its employment and price stability goals, and that it would continue to assess this progress in the meetings ahead.
Central bankers will be gathering in a few weeks at the annual symposium held in Jackson Hole, Wyoming. It is expected that at this meeting, the Fed may provide further clarity on its plans and the timing thereof. The Fed’s commentary today could be viewed as the first shot across the bow for the central bank scaling back its monthly bond purchases, or QE. The central bank talked but promised nothing, allowing it to maintain its flexibility concerning policy if things were to change in the weeks or months ahead.
The ongoing viral pandemic is likely the biggest influence on the Fed. The Delta variant of the virus has been spreading quickly and has caused concern among investors. Vaccination progress may alleviate some of the concerns, however, the virus remains a very potent economic player.
The Fed is not only having to battle the virus, but is also having to contend with higher inflation. The threat of rising price pressures could force the Fed to make changes to monetary policy earlier than hoped for. If the Fed feels the need to raise rates earlier than expected, it could have serious consequences for the global economic recovery. The next several months could be very tedious for central bankers as markets could see rising volatility and selling enter the picture.
The gold market is back firmly above the $1800 level in late afternoon trade Wednesday. The market appears to not be paying much attention to the Fed commentary as the central bank did not announce anything new. The bulls may be seeing this as a green light to buy, however, as the Fed appears to want to keep policy steady. The next few trading sessions will tell us how the bulls feel following the Fed and if there are any major concerns over premature Fed action. The gold bulls will need to put some distance between current prices and the $1800 level in order to alleviate near-term vulnerability. A breakdown below this level in the days ahead could potentially signal a larger breakdown on the horizon and could send the bulls scrambling for the exits.
Against the current backdrop of heightened inflation, easy monetary policies and dollar weakness, it may be difficult for the bears to stage a market assault sufficient to take prices below the recent trading range. The bulls will need to step up soon, however, in order to avoid a test of the range bottom.