Excess reserves statement by Chairman Powell moves markets
It’s not a very glamorous incentive for the gold market, but we might look back at today’s events in future years as an important turning point
UPDATE: Post-Fed Statement (6-13-2018, 3pm MDT)
USAGOLD note: Nothing was said about excess reserves in the post-FOMC meeting statement and Fed chairman Powell waited until the end of his press conference opening statement to drop the “surprise,” as CNBC called it in an article by Jeff Cox published over the weekend. The Federal Reserve will indeed hold back the rate on excess reserves by five basis points – raising it by 0.2% – and push up the Fed funds rate by 0.25%. Though not a monumental juggling of the numbers, it is the message that the Fed is trying to send to the markets that is important. The Fed is clearly interested in incentivizing commercial banks to draw down their excess reserves and lend that money into the economy. The reasons why that is an important development are covered further on in this post and treated more substantially in the list of related links at the bottom of the post just beneath this one.
The market reaction was immediate. The announcement was made about 35 minutes into the press conference (See chart). Gold immediately headed north and the dollar south. Stocks plummeted and the yield on the 10-year Treasury, which had advanced sharply to over the 3% mark before the press conference, promptly dropped to 2.97%. Obviously, a healthy number of market participants share our view that the Fed is interested in stimulating the money supply and inflation, or in the very least, interested in letting the markets know it will stay out of the way should both begin to increase. That message was received loud and clear, though it might take some time for the impact to be completely understood and priced into various markets.
By the way, silver jumped 1.3% at the time of Powell’s announcement and gold concurrently went up .3%. In other words, silver went up 4x faster than gold. This is further indication that the market is reading a potentially inflationary outcome from the Fed’s new excessive reserve policy.