President Trump will reshape the Federal Reserve. What does it mean for the gold market?

There are currently two big unknowns widely discussed by the financial analysts and investors. The first one are the prospects of tax reform. This week all eyes are on Capitol Hill, as the Senate is expected to vote on the tax bill. If the reform does not pass, the risky asset will decline, while gold will shine. But if the bill passes, we could see a return of the so-called Trump trade, which could be negative for the gold market.

The second big question mark is the future stance of the Fed. After Yellen’s resignation from the Board of Governors (she could stay on the Board, even if dismissed as the Chair) the number of vacancies among the seven top board members is now four. It means that Trump could significantly reshape the composition of the Fed. According to Mark Grant, it means a more dovish stance, as Trump is focused on economic growth and higher interest rates clearly hamper economic activity.

We dare to disagree. First, Powell declared several times his attachment to the policy of gradual tightening. Second, inflation is likely to increase next year. Look at the oil prices.

Third, Trump has to nominate candidates likely to be accepted by the Republican-controlled Congress. Although the Republicans like economic growth (who does not?), they are afraid of inflation. Hence, they are not likely to support excessively dovish candidates.

Fourth, it is far from being clear that gradual hikes are detrimental to economic growth. Actually, the financial conditions are still very loose, or even easier than before the start of the current tightening cycle.

Last but not least, there will also be rotation among the regional Fed presidents in 2018. Neel Kashkari, the most radical dove, will drop out of the voting group. Charles Evans, also considered a dove, will also cease to vote next year.

We will analyze the next year’s FOMC composition in detail in the December edition of the Market Overview. Here we would like to just point out that the Trump Fed does not have to be dovish and refrain from the policy of gradual tightening. It may be the case – surely, with four vacancies at the Board almost everything is possible. However, we rather expect a bit more hawkish FOMC in the future, which is not good news for the gold market. But the shift will not be immediate, as it takes some time to fill the vacancies. And without some convincing evidence of the pickup in inflation, there might be a short pause in interest rate hikes, indeed.