The Fed’s Latest Actions and Their Effect on Gold

The Federal Reserve last week published the minutes from its most recent Federal Open Market Committee (FOMC) meeting. That gives a better insight than the monetary policy statement about the direction of the Fed’s monetary policy going forward. So what insights might the most recent minutes have for gold investors?

Winding Down the Balance Sheet

Perhaps the most important part of the minutes relates to the Fed’s plan to wind down its balance sheet. The details for that wind-down were first made public after the last FOMC meeting, but the minutes seem to make it clear that the details of the plan were already in the works for some time before the meeting and were merely ratified officially at the meeting.

That means that the Fed is finally getting serious about winding down the size of its bloated, $4.5 trillion balance sheet. While there was no fixed date for beginning balance sheet normalization, the FOMC did seem to indicate that this would happen in 2017. Given the Fed’s reluctance to make any sort of monetary policy change at an FOMC meeting that isn’t followed by a press conference, the earliest the Fed might begin to normalize the balance sheet will be at the September FOMC meeting. More likely, though, is that the unwinding will be announced at the December FOMC meeting, with the policy to be implemented beginning in 2018.

As a reminder, that balance sheet unwinding will start off at a maximum of $10 billion per month and rise to a maximum unwinding of $50 billion per month, so it will take years for the Fed to get anywhere close to normal.

Economy Projected to Grow

As far as economic projections, Fed economists and policymakers thought that second-quarter GDP growth would be stronger after a lackluster first quarter. Given some of the recent headlines about slowing economic growth, it remains to be seen if those projections will be accurate. The first estimate of GDP figures won’t be released until July 28th, two days after the FOMC concludes its next meeting.

Fed policymakers also noted stronger employment figures, particularly the continued drop in the unemployment rate, however, they also noted that wage growth has been stagnant in many areas. Overall, though, they expected that economic activity would expand and the labor market would strengthen. Therefore the FOMC decided to raise its target federal funds rate another 25 basis points, to between 1.00 and 1.25%.

Impact on Gold

Anecdotal reports on the strength of the economy that have come out since the last FOMC meeting have cast some doubt on the economy’s strength. That’s a good sign for gold, as investor worry about a coming economic downturn should push more investors into gold and silver, pushing up their prices.

It’s highly likely that no monetary policy changes will be made at the July meeting, so the September meeting should be the next meeting that’s in play. Assuming no major economic shocks, the rise in interest rates should be a good sign for gold. The expectation of further rate hikes later in the year should hold up. While conventional wisdom holds that rising interest rates exert downward pressure on gold prices, that doesn’t really hold up to scrutiny.

Rising interest rates now mean a gradual end to quantitative easing, meaning an end to the stock and bond bubble. That will worry investors and spur them to move into gold and silver as safe havens. The Fed’s rosy outlook isn’t shared by markets, so the future should be golden for gold investors.