The Federal Reserve Board recently published the minutes of the May 2-3 meeting of the Federal Open Market Committee (FOMC), giving an insight into the thinking of Federal Reserve policymakers regarding the strength and health of the economy. Since detailed transcripts of FOMC meetings are only released after a five-year lag, the FOMC minutes are the most thorough summaries of the thinking of Federal Reserve policymakers that are available for analysis, aside from the occasional speeches that they make. Market analysts pore over the minutes and try to glean as much information from them as possible.
Monetary Policy Going Forward
The most important takeaways from the FOMC minutes are always buried towards the end, and that is the stance that the FOMC will take towards monetary policy going forward. The Committee noted that economic growth in the first quarter of 2017 was a little weak, but they believed that that was only a temporary blip. However, the FOMC still wants to see evidence that this was only a fluke before they continue to raise their target interest rate.
The next publication of employment data by the Bureau of Labor Statistics (BLS) is scheduled for June 2. The FOMC meets again June 13-14. If the data that BLS publishes shows weakening of the labor market, maybe a small upward increase in the unemployment rate or an increase in the number of people who gave up looking for jobs, then the FOMC might decide to hold off on increasing interest rates for another month.
Now, let’s say that the data is bad and the Fed decides to keep rates steady. Markets could take that two ways. The first is that they could react to the data as a sign that the economy is bad, and markets would decline. Or they could react to the Fed’s decision not to tighten monetary policy and see it as a benefit, that accommodative monetary policy is here to stay. Given the history of market reactions to Fed policy over the past decade, the latter is more likely, at least at first among investors in the stock and bond markets. Those investors don’t want to see an end to the Fed’s gravy train. But at the same time, investors who understand that as a sign of market weakness will pour money into precious metals, driving up prices of gold and silver.
Views on the Economy
The views of FOMC members and their staff on the health of the economy is worth looking at too. The Committee judged the labor market to be strong, but blamed lower-than-normal job increases in February and March on the weather. We’ll see whether weather factors into Committee views in the June FOMC meeting.
FOMC members also viewed GDP growth in the first quarter as slowing, although they chalked it up to “transitory factors.” What exactly those factors were was not explained. Remember that this is the same Federal Reserve that failed to see the last housing bubble as it was occurring, the same Fed that saw “green shoots” while the economy was still in the doldrums, and in general has done a uniformly poor job of economic prognostication.
But while the Fed’s economic forecasts may not be accurate, they still give an indication of what FOMC members are thinking. And because the FOMC doesn’t seem to know what’s going on, the smart investor who invests in gold and silver can anticipate moves in gold and silver prices based on what the Fed might do. Since Fed policymakers seem not to understand the economy’s underlying fundamentals, it’s safe to say that gold and silver prices will continue to increase over the course of the year. Investing in gold and silver now, such as through a gold IRA, can position you well to reap gains in the coming year.