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Fed Upbeat About Economy, but Gold’s Reaction Says Statement was Dovish

By:
James Hyerczyk
Published: Jul 27, 2016, 20:02 UTC

The U.S. Federal Reserve delivered what investors expected on Wednesday, it opted not to raise interest rates and it was more upbeat about the economy

FEDERAL RESERVE

The U.S. Federal Reserve delivered what investors expected on Wednesday, it opted not to raise interest rates and it was more upbeat about the economy than it was a month ago.

The Federal Open Market Committee kept its overnight interest rate target in the 0.25 percent to 0.50 percent range. However, it noted in the subsequent monetary policy statement that the labor market has “strengthened” and said other indicators were pointing to growth.

The FOMC said in its statement that “job gains were strong in June following weak growth in May”, referring to nonfarm payrolls that rose from 11,000 to 287,000 over the one-month period. “On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months.”

Daily December Comex Gold

Things weren’t all rosy, the Fed noted that inflation is “expected to remain low in the near term” and then rise as the decline in energy prices turns and the labor market continues to strengthen.

The statement went on to say that “near-term risks to the economic outlook have diminished.” The Fed also said “household spending has been growing strongly.” This is an upgrade from the June statement, but it also noted that business investment has been soft. This point was highlighted by the poor showing in Wednesday’s durable goods report.

Daily September U.S. Dollar Index

Overall, the statement set a better tone for the economy, reflecting the significant improvement in a few key areas over the last six weeks. However, the Fed realizes the markets are fragile at this time due to lingering concerns over Brexit and the dovish tone presented by several major central banks that are set to cut rates within the next two weeks. These include the Reserve Bank of Australia, the Bank of England and the Reserve Bank of New Zealand.

Although Fed officials has in the past expressed concerns over geopolitical developments, concern over global events was left out of the statement. However, it did keep in the statement that it would continue to monitor financial conditions. So even though the Fed was more upbeat about economic conditions, it remains cautious.

U.S. stock markets reacted positively after the Fed left rates unchanged as traders commented that the statement was neutral rather than hawkish or dovish. The general tone suggested that the market felt the Fed was correct in upgrading the economy, but it didn’t say with conviction that it was ready to raise interest rates.

Some investors believe the Fed did hint strongly at a September rate hike by using phrases such as the labor market “strengthened” and that “near-term risks to the economic outlook have diminished.”

Treasury yields were lower, with the 2-year yield near 0.72 percent and the 10-year yield around 1.51 percent. This is an indication that Treasury yields didn’t put much confidence in a near-term rate hike.

The September U.S. Dollar Index also lost ground suggesting a dovish interpretation by Forex traders. The last report showed the EUR/USD at 1.1050, up 0.0065 or +0.59%. The GBP/USD was also trading higher at 1.3193, up 0.0066 or +0.50%.

December Comex Gold investors probably offered the most dovish assessment of the Fed statement. They drove gold to its highest level since July 14 at $1349.00, up $20.70 or 1.56%.

 

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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