Fed Leaves Interest Rate Unchanged (Again)

Gold Advances Before and After Announcement

The U.S. Federal Reserve Policy Committee tried, but once again failed to act on its December 2015 forecast of four interest rate increases this year. Committee Chair Janet Yellen stated that the Fed remains data dependent “and the recent data just does not support a move higher.” Furthermore, “I’m just not convinced the Fed will be in a better position to raise rates in December.” The Reserve Committee’s point of view is becoming increasingly fractured, as rate hike hawk Esther L. George of the Federal Reserve Bank of Kansas City was this time joined by Boston Fed President Eric Rosengren and Cleveland Fed President Loretta Mester in voting against the decision, resulting in a 7-3 vote that observers call highly unusual.

A Little Bit Yes, A Lot of No

The Fed’s post-meeting pronouncements are characterized by a multitude of mixed messages, no doubt a result of what can be characterized as a highly mixed bag of economic data. The central bank’s written statement reads, “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” It puts a positive spin on the economy, citing “solid” job gains, an influx of workers to the market, and an unemployment rate of near to 5% (considered as full employment, taking job and people movement into account). But hiring and temporary work remain slower than expected, as does output growth. Real GDP growth for the second quarter is now estimated to have increased a mere 1.1% and the Fed’s own projections for short-term and long-term growth have dropped from 2% to 1.8%. No portrayals or even hints of a galloping economy here, now or to come. But the hike hawks are saying that refusing to act could spur inflation which would demand a sharp rate increase at some point. Janet Yellen acknowledged this in her news conference, saying “We could cause a recession…”

Precious Metals Shine Even More Brightly

Gold futures scored yet another advance and extended gains after the pronouncement, after a slight dip in the US dollar. Silver rose 2.6%; platinum went up by 1.7%; palladium once again experienced a modest increase.

Take-Away

There is an elephant in the room. It is the November election. The next time the Fed Committee meets will be the week before the vote and it is therefore expected to hold the line, fearing any accusations of imposing any political influence on the democratic process. Those accusations have nonetheless already been levelled at Janet Yellen which she, of course, denies.