Can We Believe the Fed Amid the Looming Recession?
The December FOMC meeting was interpreted as hawkish; fundamentally, that should have sent silver prices lower, but it didn’t happen immediately. Why?
The FOMC raised interest rates by 50 basis points in its last meeting, a reduction from the 75-basis points moves seen in a few previous meetings. That’s a dovish change, which is fundamentally positive for the precious metals.
However, the slowdown was widely expected and already priced in. What was a bit surprising (and hawkish) was the change in the fresh economic projections. The median projection for the appropriate level of the federal funds rate came at 5.1 percent at the end of the next year, a half of a percentage point higher than projected in September. Thus, we have a situation in which the recent inflation data was lower than expected, but the Fed signals that it’s going to be even more restrictive than previously indicated. It’s bad news for the silver prices.
Powell Sounds Hawkish
At his press conference, Powell still sounded hawkish. When describing the slowdown in the pace of rate hikes, he pointed out that “50 basis points is still a historically large increase, and we still have some ways to go”. Powell also admitted that inflation reports for October and November show a “welcome reduction in the monthly pace of price increases”. But it’s not enough for him to change the course of action, as “it will take substantially more evidence to give confidence that inflation is on a sustained downward path. Price pressures remain evident across a broad range of goods and services.”
In other words, the Fed Chair pointed out that the interest rates, although 425 basis points higher than at the beginning of this year, are not high enough yet:
We’re not at a restrictive enough stance even with today’s move … We’ll get to that point, and then the question will be, how long do we stay there? And there is the strong view on the committee that we’ll need to stay there until we're really confident that inflation is coming down in a sustained way, and we think that that will be some time.
Powell also said that it was too early to talk about cutting interest rates and he ruled out any modification to the 2-percent inflation target. Hence, the Fed is not preparing for the pivot, at least in the near future. This might be disappointing for the silver bulls.
Implications for Silver
What does the FOMC statement on monetary policy and Powell’s press conference imply for the silver market? Well, December’s monetary policy show was considered hawkish, and it became clear that the Fed is planning to hold rates higher for longer. However, as the chart below shows, the price of silver continued its upward trend at the beginning. It declined with a short delay.
The reason for this might be that the markets were not believing the Fed. After all, the FOMC participants significantly reduced their GDP forecast for the next year (from 1.2% seen in September to just 0.5%), which implies that they are noticing substantial effects of their actions. In other words, the Fed signals might not be credible if a recession arrives. Powell admitted himself that with the Fed keeping rates higher for longer, the odds of a soft landing are narrowing.
Anyway, in the short run, the price of silver (and gold as well) may decline a bit (or already has) amid the hawkish interpretation of the FOMC meeting. However, given the economic slowdown and less aggressive Fed, the next year should be much better for the precious metals than 2022.
Arkadiusz Sieron, PhD