Gold gains as USA dollar weakens after cautious Fed speech

Virginia Carson
December 3, 2018

"Participants also commented on how the Committee's communications in its post-meeting statement might need to be revised at coming meetings, particularly the language referring to the Committee's expectations for "further gradual increases" in the target range for the federal funds rates", the minutes said. But the likely pace of rate increases next year remains a subject of speculation.

Markets also focused on the G20 summit in Buenos Aires this weekend, where US President Donald Trump and his Chinese counterpart, Xi Jinping, are scheduled to discuss trade matters. That relieved investors who feel the 9-year-old bull market could come to an end if rates rise too fast. We also know that moving too slowly - keeping interest rates too low for too long - could risk other distortions in the form of higher inflation or destabilising financial imbalances.

Rates "are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy", he added. Many people, including Trump, say they are hopeful the two leaders will reach a breakthrough and avoid further tariffs.

Trump argued that the Fed's policies were damaging the economy and pointed to the recent stock market declines and General Motors' announcement Monday that it would cut up to 14,000 workers in North America and put five plants up for possible closure.

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The speech signalled a move away from past statements. Critics have expressed worry that the president's attacks threaten the Fed's ability to operate free of political pressure.

Markets are now trying to divine Powell's plans from data pulling in two directions - rising wages that could be a precursor to inflation, for example, compared to slowing growth and falling oil prices that may keep inflation down, or other indicators clouding the picture.

"Even if central bank policies are fully anticipated by the public, some adjustments could occur abruptly, contributing to volatility in domestic and worldwide financial markets and strains in institutions", according to the Fed report. It followed several weeks of market volatility that some investors had blamed on uncertainty over the Fed's intentions, among other things.

In his speech Wednesday, Powell made no mention of Trump's criticism, and he wasn't asked about it during a question period with economists afterward.

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The Fed chairman said the central bank is monitoring potential vulnerabilities in the banking system to ensure its continued stability.

But Wednesday's report stopped short of drawing "a bottom line conclusion" - a point Powell reiterated in his remarks, adding that the semiannual survey should be viewed as a routine checkup. On October 2, in a question-and-answer session on PBS, he said "extremely accommodative" interest rates had been needed in the past but they were "not appropriate anymore".

"There is a great deal to like about this outlook", Mr. Powell said.

It isn't clear that these conditions could trigger a recession on their own, he said, noting that the ratio of corporate debt to economic output didn't seem unusual.

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Almost all economists anticipate the Fed will raise rates at the upcoming meeting in December, and the Fed has penciled in three rate hikes in 2019 - though it remains to be seen whether Powell will follow through with that plan after his comments this week.

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