Gold is maintaining a defensive tone as markets continue to ruminate over who might be the next Fed chair. Amid news that some perceived policy hawks are in the mix, worries over the implications for the ‘slow and steady’ policy normalization stance has lifted yields and the dollar, weighing on the yellow metal.
See yesterday’s DMR for a more in-depth look at why appointing a hawk to chair the Fed doesn’t really align with the President’s proposed fiscal policies.
Janet Yellen’s term as Fed chair doesn’t end until February 03, 2018, so this debate seems a bit premature. In fact, Ms. Yellen remains in contention for reappointment.
Of greater importance is what the Fed will do at its December FOMC meeting. The market believes another rate hike is all-but a sure-thing, but I’m wondering what has changed since the Fed paused in September?
Upticks in inflation are being largely attributed to the hurricane inspired rise in energy prices. That affect should be mitigated in the weeks ahead. If anything is “transitory” on the inflation front, it’s probably the recent gains.
The following chart shows the Fed’s preferred measure of inflation. Note that the annualized rate of core PCE inflation reached a high of 1.8% — shy of the 2.0% target — in December 2016 when the Fed raised rates for the first time since the feint of December 2015. Inflation reached 1.8% again in March of 2017 with the second rate hike of this cycle, presumably with the assumption that the central bank was serious this time. However, inflation has slowed since then, even with the June hike.
U.S. Core PCE Price Index YoY
So again, if illusive inflation was the cause for the pause in September, why is everyone convinced that the Fed will un-pause in December? Tighter policy is in fact an antidote for inflation, so if 2.0% inflation is what you desire and you never got there with policy that is easier than that of today, raising rates further really seems counterproductive.