The Fed Calls its Bluff and Blesses Gold

In the Fed’s March policy statement this week, a funny thing happened on the way towards acknowledging the stronger US economic data of late – they largely ignored it and buried notice beneath a blanket concern for the ailing health of the global economy. By doing so, they broke the back of the US dollar, which had already begun unwinding the overshoot – that to a great degree had been motivated by the Fed’s own projections over the past two years of a tightening cycle more comparable to previous contemporary rate hike regimes, than the realities of normalizing policy from ZIRP. When the dust settled on the statement, the Fed had walked back their scope for raising interest rates through the end of this year from one percentage point to only half a percentage point and lessened the trajectory of prospective future rate hikes through 2019 to 3.25 percent from 3.50 percent.
Why they chose the March meeting to shift expectations is an open question – as well as the follow-up of whether the Fed’s ‘hike-hype’ was always a strategy to begin with. As we’ve noted over the years, in the trough of the long-term yield cycle where a fraction of a percentage point is likely the best the Fed can reach for, policy is administered through posture as much as action. While it was more discrete than conventional policy expectations, a strong dollar – disinflation and rising real yields largely accomplished the heavy lifting of tightening for the Fed this time around.

This post was published at GoldSeek on Sunday, 20 March 2016.