After the two-day FOMC meeting that ended on Wednesday, everyone was looking forward to the Fed's decision on monetary policy, in which there were no surprises when Fed Chairman Jerome Powell remained committed to zero interest rates until the end of 2022.
However, during a virtual press conference after the meeting, Powell told investors that, in principle, it is quite difficult to see a quick and sharp recovery in the economy. He said that the employment data for May, which revealed a 2.5 million increase in employment, is probably the "biggest surprise of data in history." When asked about raising rates, Powell answered in surprise: "We are not thinking about raising rates. We are not even thinking about thinking about raising rates." Such statements greatly pleased investors in gold, and so they began selling stocks, turning part of the profit into gold.
In addition, the Fed has confirmed its commitment to continue increasing its balance sheet, which has already exceeded $ 7 trillion, at the current pace over the next few months.
By the end of the year, the Fed will purchase $ 80 billion in treasury bonds and $ 40 billion in mortgage-backed securities (MBS).
Thus, based on such Fed's policies, Ole Hansen of Saxo Bank said that gold is on a knife's edge, as the focus of the regulator is now on bond yields. Hansen said that controlling the yield curve on the part of the Federal Reserve System could change the situation with gold, adding that this step by the US central bank could become the trigger that gold needs to exit its current range.
As real interest rates become more negative and geopolitical tensions increase, the price of gold will mainly base on the supply side rather than demand.
The Fed's ongoing monetary policy will keep the reflation trade intact, but the US economy is showing further signs of stagflation.
The basic economic theory of stagflation is that the fusion of stagnation and inflation is the result of poorly constructed economic policies. Raising taxes increases the cost of doing business and leads to higher prices, but prices are rising now only because of higher costs, not demand.
Thus, there is a price increase right now, defined as inflation, but without economic growth or demand, which creates a breeding ground for stagflation.
