Published: Sat, December 01, 2018
Money | By Hannah Jacobs

As Fed rethinks path for rates, gold poised to rally in 2019

As Fed rethinks path for rates, gold poised to rally in 2019

United States central bankers believe another interest rate hike is due "fairly soon", boosting widespread expectations the Federal Reserve will raise lending costs next month, according to meeting minutes released Thursday.

The spread on euro-dollar interest rates future is negatively correlated with emerging markets as higher interest rates in the U.S. dim the appeal of risky assets.

An expected December rate increase was further cemented into place. This should be clarified at the next meeting on December 18-19.

"The unemployment rate is 3.7 percent-a 49 year low, and many other measures of labor market strength are at or near historic bests", he said.

By saying rates were slightly lower than the level he perceives as "neutral", Mr Powell's statement appears to be suggesting at least one more interest rate increase is coming in the near future.

His comments sparked a surge in a stock market that had struggled of late and came in the wake of criticism of the Fed's rate increases by President Donald Trump.

Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral.

Powell had earlier stirred a debate over tightening when he flagged potential headwinds to the economy amid a sell-off in equities and concerns over slowing global growth.

Ironically, it was a reference to that guidepost that led to what in retrospect looks like a communication stumble, when stocks tumbled in early October after Powell's remark that interest rates were a "long way" from neutral and might even need to rise above that level.

Still, Powell sent the stock market soaring by suggesting that interest rates are just below the so-called neutral rate at which they will neither boost nor slow growth. "If US growth slows down next year, as expected, gold would benefit from higher demand", analysts including Jeffrey Currie said in a November 26 note that endorsed bullion as one of its top 10 trade ideas for commodities.

But markets, especially after the recent selloff, were focused less on such subtleties than on what Powell may have telegraphed about the future path of rate hikes. "And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing", he was quoted as saying in the report. But that approach is no longer appropriate, Powell said. Home sales, vehicle sales, business investment and other parts of the economy that are sensitive to interest rates have begun to soften, evidence that the Fed's eight rate increases since 2015 are changing household and business behaviour. "It's ironic that a concept, the neutral rate, in which the Fed has such little confidence, has swung markets so dramatically in the past two months", Basta said. Bloomberg Economics anticipates three increases.

The minutes of the November meeting showed Federal Open Market Committee policymakers had on their agenda a series of issues, ranging from a tightening of financial conditions, global economic risks, "and some signs of slowing in interest-sensitive sectors", that had begun to sway their assessment of the economy.

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

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