The Fed turns neither hawkish nor dovish. It turns symmetric! What does it mean for the gold market?

Fed Pauses in May

In line with expectations, after an upward move in March to a range of 1.5-1.75 percent, the U.S. central bank unanimously left the federal funds rate unchanged at its recent meeting in May:

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

Why did the FOMC not raise interest rates? First, there was no press conference scheduled, so chances for a rate hike were small. Second, the Fed completely removed the following sentence from its statement: “The economic outlook has strengthened in recent months”, presumably noting some slowdown in economic activity.

But (Inflation) Signs Are Everywhere

As market participants did not expect a hike, the attention focused on the signals the Fed sent. Investors are trying to guess whether the Fed will hike three or four times this year. Let’s analyze the changes in the recent statement.

On the hawkish side, the Fed acknowledged that inflation has recently risen close to the central bank’s goal of two percent (and that it will run close to that level):

On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.

This is an important change compared with the previous statement, when the Fed wrote that both overall and core inflation “continued to run below 2 percent.” The adjustment came after the publication of data showing that the PCE Price Index hit the FOMC target in March (the core index was close behind, rising to 1.9 percent), as one can see in the chart below.