Wednesday (March 17) in the Asian session, the dollar index remained firm, now trading around 91.90; Spot gold rose modestly, now trading around $1,734 an ounce. This trading day investors will focus on the Federal Reserve interest rate decision and Fed Chairman Colin Powell’s press conference. The recent rise in Treasury yields, which has weighed on gold, could pave the way for further dollar strength and lead to another sell-off in gold if the Fed downplays the surge in yields at its latest meeting.
What is the market concerned about when the Fed decision strikes?
The US Federal Open Market Committee (FOMC) will announce its decision on interest rates at 02:00 Hong Kong time on Thursday. Fed Chairman Colin Powell will hold a press conference at 02:30 Hong Kong time on Thursday.
The U.S. central bank is expected to keep its accommodative policy policy unchanged and is expected to reiterate that it will keep interest rates near zero until the economy reaches full employment. The focus is on the recent surge in Treasury yields, rising inflation and the economic outlook.
At the Fed’s two-day monetary policy meeting, policy makers are expected to forecast that the U.S. economy will grow at its fastest pace in decades in 2021, with unemployment falling and inflation rising, but they are unlikely to change monetary policy.
“The Fed is likely to maintain its stance as there are no clear signs of a significant increase in inflation and equities appear to be doing well after last week’s yield concerns,” said Juan Perez, currency strategist and trader at Tempus Inc.
Jim Wyckoff, senior economist at Kitco.com, said that while no change in monetary policy is expected at this week’s meeting, traders will be closely watching the Fed’s report on the outlook for economic growth and inflation.
Investors will be focused on the Fed’s view of rising Treasury yields. Yields have risen recently on bets that economic growth and inflation could normalise monetary policy faster than expected.
The recent rise in U.S. bond yields has rattled markets as investors worry the U.S. economy is overheating. Investors will be watching for the latest comments from the Fed, which has appeared to take yields in stride.
The correlation between current yields and gold is that as yields rise, gold prices fall. So far, the Fed has largely ignored the issue of rising Treasury yields, which is why Mr. Powell’s speech got all the attention this week.
Bond yields have risen by about 60 basis points since the last Fed meeting. Some in the market speculated that Mr. Powell might try to calm bond markets.
“The market will be hanging on every word of Colin Powell’s press conference,” said Rick Rieder, BlackRock’s chief investment officer for global fixed income. If he didn’t say anything, it would move the market. If he says a lot, it will also move the market.”
Looking ahead to the Fed’s decision, BK Asset Management said the market will focus on three areas: changes in GDP and inflation expectations, whether the interest rate dot chart points to a rate hike in 2022, and whether Powell maintains that inflation is temporary and a rise in Treasury yields will not cause chaos.
Analysts at Goldman Sachs noted that senior Fed officials would avoid the prospect of when they would begin to taper quantitative easing (QE) at the Fed’s policy decision on Wednesday (local time) and at a subsequent press conference with Fed Chairman Jerome Powell. Goldman Sachs believes that given the Fed’s usual cautious approach, it still needs more time to judge whether the current economic and employment recovery in the United States is sustainable, so the timing for tapering will not come until the second half of 2021 at the earliest.
Metals Daily CEO Ross Norman is looking forward to “Goldilocks” comments from Powell, who will take a cautious path amid tepid growth expectations. The key for gold is the expectation of when the Fed will raise rates, as the 10-year Treasury yield has climbed 60 basis points since the December meeting and the Fed has hinted at a possible rate hike in late 2022, faster than its previous forecast of a move in the second half of 2023.
Bart Melek, global head of strategy at TD Securities, said Powell was unlikely to make any significant new comments on the yield curve. Powell will assure us that it is too early to talk about raising interest rates. “Last time, when yields rose sharply and risk appetite wasn’t affected, he was pretty equivocal,” he says.
Deutsche Bank analyst George Saravelos said the two key drivers for the dollar over the next two years would be a worsening current account deficit and whether the Federal Reserve moves to raise interest rates. The Fed’s intention to stay behind the curve and support a controlled overshoot of inflation would do serious damage to the dollar. The bank expects the Fed to stay on hold “well into 2023”.
Barclays expects the Fed will likely continue to use rhetoric or guidance to convince equity investors that current market expectations for when and how much the Fed will raise rates are ‘too aggressive.’ The Fed is also likely to discuss the relationship between short-term and long-term inflation.
Markets will also get an update to the Fed’s quarterly forecasts. Economists at ING expect U.S. GDP estimates to be revised upwards for 2021. “There will also be a lot of interest in the dot plot of the federal funds rate,” the bank’s economists said. Will the median of the Fed’s 2023 chart shift to a quarter-point rate hike? Probably not, but if it did, the dollar would probably appreciate. But the largely unchanged FOMC statement and Mr Powell’s reiteration at his press conference that the Fed has a long way to go before tapering its stimulus should prevent the dollar from going too far.”
On Jan. 27, the Federal Reserve said after a two-day policy meeting that it would keep its benchmark short-term borrowing rate near zero and its asset purchase program, in which the central bank buys at least $120 billion a month, was in line with market expectations. “The pace of recovery in economic activity and employment has slowed in recent months, with weakness concentrated in sectors most affected by the outbreak,” the FOMC wrote in its post-meeting statement. The statement reiterated that COVID-19 “is causing enormous human and economic hardship in the United States and around the world.”
At a news conference after the Fed’s Jan. 27 meeting, Powell said the Fed will maintain its accommodative monetary policy until both goals are achieved. The logical scenario for the Fed would be a high level of easing. Powell said that anchoring inflation expectations is important and that the U.S. economy may still be “some time” away from making substantial progress. He also said it was not the time to discuss a date for scaling back asset purchases.
Beware of Fed decision leading to another sell-off in gold
If the Fed doesn’t address the yield issue, the dollar could strengthen further and gold could take a hit, some analysts say. US Treasury yields rose on Tuesday ahead of the Fed’s first policy meeting. The yield on the benchmark 10-year Treasury note rose to 1.62 percent.
Gold is down more than 8 percent so far this year as 10-year Treasury yields have risen for six straight weeks under pressure from a rising dollar and a sell-off in the bond market.