Gold News Monitor
originally sent to subscribers on February 26, 2015, 7:49 AM.
As we
have already reported, Janet Yellen testified two days ago to the Senate
Banking Committee. Yesterday the Fed’s chair submitted identical remarks to
the Committee on Financial Services, U.S. House of Representatives. What we
want to analyze today are, thus, her question-and-answer sessions from these
two days and their implications for the gold market.
Following her testimonies, Yellen was asked many times about the inflation
in different contexts. On wages and inflation, two days ago she answered:
“I don't see any evidence of that (inflation heading above 2
percent) ... we need to be forward looking... We do see that the
labor market is improving and we are getting closer to our goal of maximum
employment. It's important to remember that monetary policy is highly
accommodative.”
It is an important hint: the Fed does not see inflation heading above the
target. All that remains is the belief that disinflation will be transitory.
Just forget about the harsh present reality, we have to be forward looking.
It is a bit ironic that a Keynesian economist, who should be repeating all
the time that in the long-run we are all dead, says that the future is
bright. It seems that the philosophical position depends on whether the Fed
should introduce or give up a highly accommodative policy.
The next answer, from today’ session, is even more bullish for the gold prices.
"We think that inflation is going to move lower before it moves
higher for exactly the reasons you cited: import prices have been falling in
part because of the dollar, and declining oil prices have had a very major
influence ... We do think that the effects of these factors will be
transitory and, especially with an improving labor market, that we
expect inflation over the medium-term, the next two or three years, to move
up to our 2 percent target."
It seems that Fed adopted a rather uncommon definition of ‘transitory’.
Usually it means short-lived, however for Yellen inflation may move up just
over the next two or three years, after the ‘transitory’ factors have ceased
to influence the economy. So, how does this affect the timing of the Fed’s
hike? Well, Yellen gives an answer:
“Before beginning to raise rates the committee needs to be reasonably
confident that over the medium-term inflation will move up toward its
2-percent objective. I don't want to set down any single criterion that is
necessary for that to occur. The committee does look at wage growth. We have
not yet seen - there are perhaps hints - but we have not yet seen any
significant pick-up in wage growth."
When will the Fed be reasonably confident about the future dynamics of
inflation (if it is possible at all)? Just imagine Yellen’s answer. Uhm. Good
question. Fed does not have any single criterion to measure an inflation, but
we can look at wage growth. Yes, I said a moment ago that “wages tend to be a
lagging indicator of improvement in the labor market”, but we can use it to
assess future inflation. It does have perfect sense, we have to be
forward-looking.
Let’s move joking aside. The Fed makes an interest rate hike dependent on
the level of inflation, while inflation depends on wage growth. So, what is
Yellen’s opinion about the labor market and future wage growth?
"(The U-6 measure of unemployment) is a much broader indicator of
underemployment or unemployment in the U.S. economy ... It definitely shows a
less rosy picture than U-3 or the 5.7 percent number and I did mention that
we don't at this point, in spite of the fact that the unemployment rate has
come down, don't feel that we've achieved so-called maximum employment in
part for these very reasons ... Labor force participation has come down ... I
don't expect it to move up over time, but I do think a portion of the depressed
labor force participation does reflect cyclical weakness in that in a
stronger job market more people would enter."
It does not sound too optimistic. As we have pointed out, looking from the
broader perspective, like the U-6 measure of unemployment does, the labor
market is far from full recovery.
To sum up, the Fed makes an interest rate hike dependent on the level of
inflation, while inflation depends on wage growth, which has not recorded any
significant pick-up in wage growth. It means that the Fed signals no rush to
raise rates. Therefore, we interpret Yellen’s spontaneous answer sessions as
bit more bullish for the gold prices than the carefully prepared testimony.
Taking under account gold prices after Yellen’s testimony, the market could think
similarly and the long-term outlook for gold remains favorable. Based on the
technical developments in the gold
charts, though, the short-term outlook does not have to be as bright.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News
Monitor and Market Overview Editor
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