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What did the Fed teach us last week?

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Fed stays neutral/bearish

At the last Federal Reserve meeting Jerome Powell tried to stay as neutral as possible. Interest rates were left unchanged. The pay of QE stayed at $80 bln, and the IOER rate was left unchanged. Going into the event there was a genuine question whether the Fed would start to signal the start of talking about tapering. However, those hopes were not realised.

The Fed’s perspective

The Fed is ready to allow things to run a little hot before moving on tapering or rates. The explicit comments that were made were as follows:

  • It’s not time to talk about tapering. The Fed will signal in advance when they do.
  • Activity has only just picked up
  • Recovery is quicker than expected, by still incomplete
  • Labour market conditions continue to improve
  • The Fed don’t see wages rising yet. They would see that in a tight labour market
  • The Fed do not need to get all the away to their goals to taper
  • One good employment reading in March is not enough. Need to see more than that
  • Inflation is to be transitory due to base effects, supply bottlenecks, pent-up demand, and energy prices.
Fed stays neutral/bearish

The takeaway

In theory this is just more of the same and keeps the mainstream USD bearish case alive. However, eventually the Fed is going to taper. That is going to be USD positive and gold negative. In the 2013 taper tantrum gold lost about 20% of its value. So, looking for decent places to short gold make sense, but getting the timing right is key here.  The vaccines are working, economies are returning, so the US economic recovery can reasonable be expected. When will that be? Taper in June? Or the month after? Eventually it is coming. So, a dollar bounce can be expected.

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