The Fed did not raise interest rates at the May 2nd meeting. However, their official statement referred to “transitory signs of weakness in the economy, “balanced” economic risks, and “gradual” future interest rate hikes*.
“Transitory is Fed speak for ignoring any economic weakness and acting like everything is just fine with the economy. “Balanced” risk means there is roughly the same upside as downside for domestic growth. “Gradual” interest rate hikes means four 0.25% rate hikes/year thru 2019, unless we see disinflation, a stock market crash, or no job growth*.
None of those three “Pause” items is likely prior to the June meeting, so don’t be surprised to see a 25 basis point rate hike in June*.
The Fed was busy patting itself on the back because the unemployment rate had dropped to 4.4%. Sounds pretty good, right? Unfortunately, this is an absolutely worthless statistic because the labor participation rate continues to decline and wages remain flat. To illustrate the point, let’s say you have a room full of people and only one of them was looking for a job, while the rest of them were content to do nothing other than watch TV and eat junk food every day. If the one guy who actually wanted a job found a job, the unemployment rate would be 0.00%*. You all get the moral of the story, be careful about any numbers coming out of Washington.
The election of Macron in France this week will most likely result in a stronger Euro. Currency shifts vs. the dollar are always a “zero sum” game. A strengthening Euro will result in a weaker dollar*.
Thru interest rate hikes, the Fed is embarking on a tightening policy into an economy that is far from roaring. Tightening into a weak economy could produce a recession by this summer. If this happens, expect the Fed to resume a policy of easing and pause the September and December rate hikes*.
In conclusion, a weaker dollar and Fed easing creates an ideal environment for Gold to take off and test the $1,300 resistance level*.
* The Gold Speculator. May 9, 2017
These are the opinions of Jim Rickards and not necessarily those of Cambridge, are for informational purposes only, and should not be construed as investment advice.