Gold prices blasted off and headed to orbit after today’s Federal Reserve Open Market Committee meeting turned out to be much more dovish than expected. The spot gold daily chart looked as if it were tracking a rocket launch after the Fed’s policy statement, refusing to pause for breath. In fact, all precious metals had gained nearly 2½% in the first hour after the Fed statement.
Wall St., after dipping into the red immediately before the meeting ended, decided that it liked what it heard almost as much as gold did. The dollar dropped precipitously on the news, which sent New York crude prices 5% higher.
Treasuries also saw hot action, with the yield on the 2-year T-note dropping from a two-month high before the FOMC meeting, to a 2-week low afterwards. 10-year Treasury yields dropped to their lowest level in over a week. (When bond prices go up, their yield goes down.)
So, What Was The Good News?
The first good news was the news the markets already expected — there was no increase of benchmark interest rates by the Fed. What touched off the euphoria in stocks, precious metals, and bonds was the news that the “dot plot” of FOMC members showed that the Fed had cut its 2016 rate hike plans in half, from four hikes to only two. This caused the odds of an April rate hike to instantly fall by more than half, to just 12% from this morning’s 28%.
The Fed noted that the steep losses in the stock market and appreciation of the dollar since January had much the same effect as a rate hike would have, so there was no reason not to stand pat this month. In addition, it observed that the struggling global economy, especially in China, was having a negative effect on the US economy that could not be ignored. This led to downward revisions to estimates for inflation and economic expansion for the US in 2016.
Some analysts conclude that the Fed is acting more like the world’s central banker than America’s central bank, while others say that no central bank can operate in a vacuum that ignores global economic conditions.
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