Gold remains fairly well bid, despite today’s firmer inflation data. The yellow metal is trading just below $1300, underpinned by geopolitical risks and perhaps slightly more dovish than expected minutes from the September FOMC meeting.
Below target inflation remains a considerable concern for the Fed based on the FOMC minutes that came out yesterday. However, that has seemingly done little to temper December rate hike expectations, which continue to hover near 90%.
Warmer producer inflation in September is being attributed at least in part to hurricane distortions. Focus now shifts to tomorrow’s CPI data, which is also expected to rise. The market and the Fed will need to ascertain if inflation is really picking up, or if these upticks are merely aberrations.
St. Louis Fed dove James Bullard says the central bank needs to defend the inflation target, or risk losing credibility. Continuing to raise rates when inflation is below 2% sends a signal that “the inflation target is not that important,” he warned.
In saying that it is a “denial of reality” to think inflation and rates would soon return to the norms of the ’90’s and 2000’s, Bullard is also acknowledging that something may have fundamentally changed. In the extreme, that may mean we will follow the path already blazed by Japan and that we are in for a perpetual state of easy monetary policy and moribund growth.
If that is to be the reality, one might wonder how stocks could possibly sustain current valuations. It would also favor the long-term downtrend in the dollar, which would be supportive for gold.