The Federal Reserve's Open Market Committee (FOMC) concludes its two-day January meeting this afternoon, and is widely expected not to make any changes to the federal funds rate. With the global economy reeling, predictions that it was more likely that the central bank backtracks and cuts rates before it raises them again are beginning to look prescient.
This has been positive for gold, as the yellow metal held just below 3-month highs at $1,117/oz on Wednesday morning, only 0.3% lower.
Fed Chair Janet Yellen will not make an announcement nor field questions this afternoon. Even in the absence of a January rate hike, the markets are going to want to be reassured nevertheless.
Due to the troubling volatility so far in 2016, traders and investors have been especially sensitive to signals from the Fed about how quickly it will be raising rates throughout this year. By anchoring expectations are four total rate hikes (averaging out to one every three months, i.e. one each quarter), anything short of this pace can be taken as a dovish move by the FOMC.
Failed Forecasts of the Past
There's good reason to doubt the optimists who believe the Fed, the world economy, and thereby the U.S. economy are all right on track to recover at the steady pace set by official projections.
"Consider how wrong economists have been about the effects of the 2008 financial debacle," contrarian economist Ashoka Mody points out. "In April 2010, the International Monetary Fund declared the crisis over and projected annualized global growth of 4.6 percent by 2015. By April 2015, the forecast had declined to 3.4 percent. When the weak last quarter’s results are released, the reality will probably be 3 percent or less."
This should make it obvious that government officials and big institutions like the IMF are always going to overstate growth expectations. Even as the markets are exhibiting great anxiety over the fate of Asia and Europe's economies (with good cause), the authorities are only so realistic in their "guidance," which is often intended to prop up consumer confidence and investor sentiment.
It's undeniable that China and Europe are in the first stages of undergoing painful adjustment periods that can't simply be avoided—meaning things are going to get (much) worse before they begin to get better. Economists can't control it, and are doing the public an enormous disservice by ignoring the problem.
Mody continues: "Financial markets often do get things wrong. But they are better than economists in sensing . . . the critical junctures where fundamental shifts occur. Politics, economics, and finance are threatening to move the tectonic plates."
Part of the point is that markets are free while economists seek to reduce things to perfect linear models that are divorced from reality.
This is why the FOMC statement today will be dovish in tone in order to make the markets feel better about what is a nasty trainwreck of a situation. There's virtually no data or sentiment to support the Fed hiking rates now or at its next meeting in March for that matter. However, the FOMC will predictably find a way not to telegraph this truth while still taking no action. Expect the statement to be "perfunctory" to avoid any such ruffling of the financial markets' feathers.
The precious metals are firmer due to the safe haven reaction to all of this.
Gold is holding its position at $1,117/oz and the Platinum Group Metals are both steady at slightly above unchanged. Key support for the gold price are at $1,116/oz and $1,110/oz, while the main resistance level is still $1,130/oz. Softer resistance can be seen around $1,123/oz. Meanwhile, silver is trading about 10¢ per ounce lower (-0.55%) on Wednesday at $14.50/oz. If today's FOMC announcement holds to form and leans dovish, it likely won't move the needle very far for the metals, at least not immediately.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.