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Gold (XAU/USD-spot) closed around 1959.32 Wednesday, edged up +0.19%, but stumbled from the session high 1973.63 to a low 1949.89 on less dovish Fed hold. Gold further crumbled to 1937.90 in the early Asian session Thursday, slips almost -1.00%. The market was expecting a more dovish hold by the Fed after disappointing retail sales for Aug and overall mixed economic data. The market was expecting Fed’s latest dot-plots may indicate near ZIRP till 2023, unemployment target below 4%, and inflation target +2.25%. Although the Fed indeed projected to be on hold near-zero interest rate till 2023, the dot-plots were somehow divided and the inflation target was not raised to +2.25%, kept at an average 2% (for longer duration).
The Fed is not willing to allow inflation running hot and basically wait for maximum employment in the evolving economic circumstances days ahead, which may not be standard 4/3.5% as in the pre-pandemic period. The Fed Chair Powell clearly pointed out that the Fed has to normalize before the next economic crisis as the Fed can’t go below 0% interest rate (NIRP), even for the reverse repo. The Fed is not ready to boost any pandemic QQE as it took a moderately optimistic view about the ongoing economic recovery and repeatedly urged for more fiscal stimulus, especially for the still 11M people, being unemployed due to corona carnage.
In brief, Powell signaled that the economy now needs more grants (fiscal stimulus) than loans (liquidity) and the Fed has done its part of the monetary stimulus with the ‘powerful’ forward guidance (dot-plot projection) of keeping rate on hold till 2023. Powell said the U.S. economy would continue struggling without help from Capitol Hill and as long as the COVID-19 curve is not contained effectively: A full economic recovery is unlikely until people are confident that it is safe to re-engage in a wide variety of activities.
On Wednesday, as unanimously expected, the Fed kept all rates and QE buying unchanged, but with 8-2 vote against 10-0 vote expectations. The Fed holds its interest (repo) rate at +0.25% to 0.00% corridor (i.e. +0.125%), IOER (interest on excess reserve-reverse repo) at +0.10% and primary credit rate at +0.25%. The Fed will continue the current pace of QE-4 buying at $120B/m at least till June’21.
The FOMC macro-economic projections: Sep vs June:
At a glance, the Fed has upgraded its GDP growth, employment rate, core PCE inflation projections for 2020 in its latest Sep forecast against earlier June. Thus the Fed is more hawkish (optimistic) on economic recovery (growth, inflation, and employment) now in Sep against earlier June and thus the Fed is less dovish than earlier.
The market realized that the Fed has almost done its part of monetary stimulus and now it’s the responsibility of the Capitol Hill/White House to move ahead, but there is still political paralysis despite some hopes of re-negotiation between Republicans (Trump) and Democrats (Pelosi). Thus Dow slips and Gold also stumbled on less dovish Fed hold, while the USD was almost unchanged ahead of BOJ.
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