The latest FOMC meeting was accompanied by Janet Yellen’s press conference. Let’s analyze the implications of her remarks for the gold market.

Solid Growth, Strong Labor Market, and Subdued Inflation

In her opening remarks, Yellen noted that economic activity has been solid recently, the labor market has been strong, but inflation has been running below the Committee’s 2 percent longer-run objective. She, thus, upgraded the macroeconomic outlook, as she used to speak about a moderate pace of economic growth and about a strengthening, but not necessarily strong labor market. Although inflation continued to run below the Fed’s target, Yellen said that the FOMC members “continue to believe that this year’s surprising softness in inflation primarily reflects transitory developments that are largely unrelated to broader economic conditions.” Hence, her introductory remarks sounded rather hawkish, which is not good news for the gold market.

Was the Fed Really Dovish?

As a reminder, the Fed did not change the expected rate path for 2018 and 2019, but it added one hike in 2020. It means a tighter monetary policy in the medium-term. It also implies that the Fed is more certain about the economic outlook up to 2020. This is why we believe that the latest FOMC meeting was not dovish, contrary to the interpretations of some economists. Why would the Fed change it inflation outlook? It believed all the time that the inflation was subdued in 2017 due to transitory reasons, so it could not upgrade its outlook for inflation – the medium-term outlook already included a moderate increase in inflation over the years. And we would say that the risk for the inflation outlook is more less balanced, as inflation may remain subdued, but it may also increase a bit next year. We would not count on a more dovish Fed in 2018 – one year ago, some analysts also did not believe that the Fed would deliver three hikes, but it did. And it may deliver three hikes next years as well. Even with subdued inflation. Why? The reason is simple – the Fed simply wants to normalize its monetary policy to have more ammunition when the next crisis hits. If we are right and the U.S. central bank will be more hawkish in 2018 (due to stronger economic momentum and personal changes in the FOMC composition), gold will struggle.