Tapering Yes, Rates No?
The highly anticipated speech by Fed Chairman Jerome Powell hit the wires earlier Friday. Powell seemingly suggested that the central bank is strongly considering tapering its monthly security purchases, or QE, before the end of the year.
The Fed Chairman did, however, take a more cautious tone about tapering, which could mean that he is looking to leave all options on the table. Powell noted that the economy has continued to make progress towards the Fed’s goals. Powell stated that he believes that policies are currently “well-positioned.” He also suggested that significant progress has been made towards inflation and maximum employment.
When pressed on the subject of when the Fed could look to remove stimulus, Powell said that such a move is likely to happen this year. He referred to the Fed’s July meeting at which the central bankers discussed the evolution of the economy making it an appropriate time to begin the tapering process. Not all was glee and roses, however, as the Fed Chairman also referred to the ongoing Delta variant viral spread as a major obstacle. While economic progress has been made, the central bank vowed to continue to monitor incoming data for any significant changes and could take action or not take action based on any changes.
Even if the Fed does begin tapering this year, the long-term securities held by the central bank may continue to be supportive of the economy and financial markets. U.S. macro data will be the key going forward and will determine if or when the Fed does begin pulling back.
What might this mean for gold?
Gold is sharply higher on the session and appears to be excited about more clues from the Fed. It has been suggested by many analysts that Fed tapering may be bearish for the yellow metal, but the exact opposite may prove to be true. The potential for the timing of Fed tapering has been a major obstacle to higher gold prices for some time now. Once that hurdle is removed, however, the market may see a green light to move higher regardless of what the Fed does or does not do.
With some of the uncertainty removed from the marketplace, the gold bulls may now be able to take charge and drive prices above the $1800 resistance level.
Powell further discussed the Fed’s potential plans and suggested that even if the central bank does scale back its monthly QE operations, that does not mean it will begin hiking interest rates. Powell said the Fed has a stringent test for any rate hikes and that the central bank will have to see if its desired 2% inflation target and maximum employment goals hold true.
It seems as if time will tell, and that the amount of time necessary may be substantial. So, the message from today’s Fed commentary seems to be clear: Expect tapering to begin in the months ahead, but do not expect interest rates to go anywhere anytime soon.