The Daily Market Report: Gold Holds Above $1200 After Fed Debates Failed Efforts to Generate Inflation

21-May (USAGOLD) — Gold is consolidating above the $1200 level after yet another rather disappointing round of U.S. economic data. The dollar initially dropped and then recovered, leaving the yellow metal range-bound.

Leading Economic Indicators for April came in better than expected, but initial jobless claims, existing home sales and the Philly Fed index were all worse than expected. This adds further credence to the Fed thinking revealed yesterday in the FOMC minutes that a rate hike in June in off the table. Arguably the latest data make a September tightening less likely as well.

Growing skepticism about a 2015 rate hike should remain generally supportive to gold. As expectations for that first Fed rate hike get pushed further into the future, ultimately we may start to hear increased talk of further easing; perhaps in the form of negative rates, or a return to QE.

The FOMC had a pretty lively debate about inflation expectations last month, with some members wondering whether the 2% inflation objective is in fact too low. This is noteworthy says Wall Street Journal FedWatcher Jon Hilsenrath, because it is happening 4-years after IMF chief economist Oliver Blanchard suggested a 4% inflation target.

I think it’s more noteworthy because the conversation continues six years and more than $4 trillion into the Fed’s QE experiment. They haven’t been able to manufacture 2% inflation, what makes them think they could possibly generate 4% inflation?

I agree with Hilsenrath that an official change to the inflation target is unlikely, but some members of the FOMC have expressed that they wouldn’t be terribly concerned by an “overshoot” of the 2% target. What would that mean exactly? 2.5%, 4%, 10%…?

If they push hard enough to achieve their inflation goals and the barriers eventually give way, they may find that overshoot is more than they bargained for. More importantly perhaps, getting the inflation genie back in the bottle may prove far more difficult than anyone expects.

You’re going to want some gold if the central bank lives up to its long-standing reputation of hubris and fallibility.