Gold Climbs on Dovish Fed Minutes, Weak Dollar

The Fed didn’t raise its key interest rate in September because USA inflation hadn’t picked up and the global economy had worsened.

The dollar rose, however, against the safe-haven yen as the outlook for accommodative central bank policy around the world drove traders into riskier currencies.

“In determining how long to maintain this target range, the Committee will assess progress-both realized and expected-toward its objectives of maximum employment and 2 percent inflation”, the Fed said in a statement.

The problem with this is that there is a growing concern that the much vaunted “data dependence” on which the Fed has relied, especially if it now includes worldwide data, could lead to inertia that will (or already has, depending on who you believe) leave them behind the curve when it comes to inflation. Notably, the government said last week that employers cut back sharply on hiring in September and added fewer jobs in July and August than previously thought.

“In the third quarter, payroll job gains have averaged 167,000 per month”. Futures traders are pricing in an 10 percent probability of a rate increase at the October meeting and 39 percent increase in December, based on an assumption that the effective funds rate will settle at 0.375 percent after liftoff.

When the Fed starts raising rates, something it has not done in nine years, it will mean higher rates for consumer and business borrowers. To be sure, New York Fed President William Dudley and Dennis Lockhart of the Atlanta Fed, speaking separately in New York, appeared doubtful they would be have enough information in hand to lift rates by an October. 27-28 policy meeting, suggesting the December. 15-16 meeting is more likely.

The weak outlook provides further support to doves on the interest rate setting committee to keep rates near zero well into 2016. It has not raised rates since June 2006.

“Recent global and financial market developments might restrain economic activity somewhat as a result of the higher level of the dollar and possible effects of slower economic growth in China and in a number of emerging market and commodity producing economies”, the minutes said. For now, “the broad economy continues to move ahead at a satisfactory pace”, he says. It predicted an average gold price of $1,170 for the rest of the year.

Officials also noted that the Fed’s policy tools were better able to deal with an unexpected jump in inflation than it could deal with inflation falling even lower. Since then, the Fed has kept its target rate unchanged and pumped trillions of dollars into the economy in hopes of spurring a faster recovery.