Gold surges as Bank of England mimic the Fed, indicating both central banks are in no rush to raise rates

Gold prices surged in trading as the Bank of England joined the central bank of the United States, expressing that they were not in favor of raising interest rates at any time in the near future. During Chairman Jerome Powell's press conference yesterday, he made it clear that they're not even thinking about, thinking about raising rates anytime soon. In terms of traders' reaction to the chairman's statements indicating that they have no set timeline in which to initiate lift-off, I believe what we witnessed today in gold was a delayed reaction coupled with the confirmation that the Bank of England was on the same page.

As of 5:50 PM EDT gold futures basis, the most active December 2021 contract had a robust gain of 1.65%, or $29.10. Currently, December gold futures are fixed at $1793. Today's gains reversed the decline in gold yesterday when gold dropped by over $20 per ounce. While it is clear that the announcement by the Bank of England supported the recent announcement by the Federal Reserve not to address interest rates, it seems more plausible that today's gains were a delayed reaction as market participants absorbed yesterday's comments by Chairman Powell as well as facts contained within the statement released immediately following the conclusion of the FOMC meeting.

Without offering a timeline, the Federal Reserve's FOMC statement talked about the necessary triggers before interest rates would be raised. In essence, the criteria are the completion of their dual mandate, which is maximum employment and inflation target at approximately 2%. Yesterday's FOMC statement laid out the necessary criteria needed for the Federal Reserve to announce a timeline on lift-off, or interest rate normalization.

"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved."

In regards to leaving interest rates (Fed funds) unchanged, the statement read as follows;

"The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."

Lastly, they announced that they would begin the tapering process reducing their monthly asset purchases by $15 billion per month. The $15 billion monthly reductions would include a $10 billion reduction per month in U.S. debt and a reduction of $5 billion monthly in mortgage-backed securities. However, there was a large caveat to that statement as the statement said;

"The Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities. Beginning later this month, the Committee will increase its holdings of Treasury securities by at least $70 billion per month and of agency mortgage‑backed securities by at least $35 billion per month. Beginning in December, the Committee will increase its holdings of Treasury securities by at least $60 billion per month and of agency mortgage-backed securities by at least $30 billion per month. The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook."

After analyzing the FOMC statement very carefully, many analysts including myself, see that the Federal Reserve is keeping all of its options on the table, including the level of tapering, and more importantly not even suggesting any kind of timeline for lift-off until the criteria that they have laid out has been met.
 

By Gary Wagner

Contributing to kitco.com

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