The Daily Market Report: Gold Rebounds Amid Mixed FedSpeak

28-Aug (USAGOLD) — Gold rebounded within the range in early trading on Friday, underpinned by some dovish FedSpeak from Jackson Hole and a downward revision to August consumer sentiment. The yellow metal remains comfortably in the upper half of the recent range.

Fed-people have been out in force in advance of the Jackson Hole symposium. Not surprisingly perhaps, it’s been a mixed back of dovish and hawkish comments, perhaps slightly biased to the former. However, nobody seems terribly willing to ‘officially’ take September off the table.

Recent market volatility and the Fed’s complete and utter failure to generate inflation anywhere close to target have been the key precipitating factors. Earlier in the week, NY Fed President William Dudley said, “From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.”

Fed Vice-Chair Stanley Fischer weighed in today on that volatility with this comment: “If you don’t understand the market volatility—and I’m sure we don’t fully understand it now, there are many many analyses of what’s going on—yes it does affect the timing of a decision you might want to make.”

Minneapolis Fed President Kocherlakota doesn’t see a September rate hike as appropriate; warning that any such move could risk the Fed’s credibility. It certainly would suggest that the Fed doesn’t take its price stability mandate very seriously. Kocherlakota actually thinks it will be “several years” before the Fed’s 2% inflation target will be achieved.

The obvious question being: Then why hike now? According to the FT, “The dominant argument for beginning the tightening cycle is to have enough “ammunition” for a new stimulus when the next downturn comes.”

Kocherlakota not only thinks the Fed should hold off on raising rates, but went so far as to say he would be in favor of further accommodations if that option were presented. A thinly veiled hint at QE4.

“The fact is, any one who doesn’t imbibe in the Keynesian Kool-Aid dispensed by the central banking cartel can see in an instant that 80 months of ZIRP has done exactly nothing for the main street economy,” quipped David Stockman in a post today. Even the Kansas City Fed has acknowledged the declining efficacy of easy policy, noting that increases in monetary policy accommodation do not raise the economy’s productive capacity.

Slow recoveries followed recessions in 1990-91, 2001, and 2007-09, a contrast to the much more rapid recoveries that followed pre-1990 recessions. These slow recoveries occurred despite sizeable monetary accommodation from the Federal Reserve, primarily through reductions in short-term interest rates. — Federal Reserve Bank of Kansas City, Economic Review

Perhaps therein lies the simple answer to the “why now” question: ZIRP and QE have simply not worked. The aforementioned Stockman piece provides rather compelling answers as to why that is so.

I have maintained that the Fed will not tighten this year because they aren’t achieving their stated goals. I agree with Kocherlakota, that such a move may well result in a serious credibility crisis for the Fed. How would it look if they tighten now and precipitate the very recession they are hoping to prevent — only to turn around and cut rates again? Arguably the massive volatility in stocks is already reflecting diminished central bank credibility.

The August jobs report comes out at the end of next week. The market is going to watching those data very closely, as it always does, hoping for some clarity one way or the other on lift-off.

Median expectations for nonfarm payrolls is +205k, down from +210k in July. The jobless rate is expected to tick lower to 5.2%.