Philadelphia, Pennsylvania – (StockNewsDesk) – 10/30/2014 — The latest FOMC statement arrived on Wednesday at 2 PM, with the biggest news being the final taper of $15 billion ending the Fed’s open-ended QE program. This was known as QE4 by traders and, unlike previous liquidity injections, it was based on economic data rather than preset amounts.
Confidence in Economic Outlook
Despite the marginally hawkish move of ending the last dose of stimulus, the Fed was careful to maintain that rate hikes were not imminent. There is the possibility that the zero percent interest rate could persist longer if growth and inflation did not materially pick up. Basically, they were communicating that future decisions would be based on developments.
In many ways, the Fed’s decision can be interpreted as expressing confidence in the recovery that the economy can continue to grow, absent monetary stimulus. One concern in recent weeks has been the overseas weakness beginning to impact the domestic recovery; the FOMC statement seemed to imply this was not a likely possibility. Additionally, the Fed also did not seem concerned about the decline in inflation expectations in the past month.
Impact on Precious Metals and US Dollar
The biggest impact of the FOMC statement was largely contained in the US dollar and precious metals. Stocks and bonds were largely unchanged. However, the dollar was up strongly on the relatively hawkish tint, implying higher interest rates sooner, especially relative to other major currencies such as the euro and yen, that remain in the midst of loosening policy. The stronger US economy and higher rates on the ten year led to one of the biggest trends of 2014, surging demand for US dollar-based fixed income.
The biggest losers on the day were precious metals with gold falling $16 and silver down as well. Both have already been under heavy selling pressure and flirting with three year lows. Gold is down over 35% from its peak in August 2011, while silver is down 65% from its peak. The selling pressure was even more concentrated in the miners and junior miners, which were down 4% and 7%. An interesting divergence has formed with gold and silver making a higher low, while miners made a lower low. Typically, the producers lead the underlying metal, so based on this, gold and silver should be expected to follow lower.
There was certainly some blowback to the FOMC statement, especially the lack of acknowledgment of the weakness in recent inflation data and threats of overseas weakness. Interestingly, many of these concerns were expressed by Fed Vice Chair Stanley Fischer and regional chairmen, James Bullard and Eric Rosengren, in recent weeks. In fact, this was one of the catalysts for the strength in the stock market and hopes of a more dovish statement.
Despite recent improvements in labor markets, there remains a considerable amount of slack. This is best seen with the complete lack of any wage inflation. When the labor market is reaching its full employment level, naturally wages start to increase as firms begin competing for talent. This is not happening and many who advocate for continued aggressive policy cite this reason as undercutting arguments for a healthy labor market.
Further, the Fed’s two objectives are to ensure low inflation and maximum employment. Without wage inflation, true inflation is impossible as there is a lack of feedback on consumer prices. Only when labor conditions are sufficiently tight, workers can demand higher wages when costs begin to rise. Therefore, many insist that the Fed should remain vigilant on unemployment as long as inflation remains limp.