The Fed’s 180: There’s “Underlying” Strength

The Fed takes a play out of Mario Draghi’s playbook: tell markets whatever they want to hear.

Bullion.Directory precious metals analysis 29 October, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

The dollar pushes higher with gold dropping nearly $20 bucks an ounce as the Fed conducts a 180. The Federal Reserve signals that there is underlying growth now, while over the last few months it was a different story.

Just last month, Fed Chair Janet Yellen said during the FOMC minutes press conference:

The labor market has yet to fully recover. There are still too many people who want jobs but cannot find them. Too many who are working part-time but would prefer full-time work; and too many not searching for a job, but would be, if the labor market was stronger.

A month later, the labor market seems to really be more than it has been:

On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing

The Fed led the markets to believe the economy is actually picking up with more hawkish-then-normal comments, while indicating rates will remain low for a “considerable amount of time.” Pulling plays out of European Central Bank (ECB) President Mario Draghi’s books, tell the markets what they want to hear and prolong the inevitable.

Note: Just a few weeks ago, the equity markets were looking at the most meaningful pullback in years, and Fed President Bullard, and others, came out of the woodwork and say it is too soon to remove QE measures. In turn, equities erase (and then some) any pullback.

Kelly Evans, CNBC anchor, said today’s Fed action of ending QE 3 was “historical.” News flash: It’s happened two other times in less than a decade. And a Yahoo! Finance article graded the Fed’s QE disaster a success. It indicated real GDP was up 9.8 percent, but that’s less than two percent growth expansion per year. Another “plus,” inflation grew from 1.1 percent to 1.7 percent. Congratulations! Consumer prices are now .6 percent more costly then they were.

As I said in my Dukascopy forecast (here), traders will eventually begin to loose confidence as the Fed’s bark becomes larger than its bite.

Former Fed. Chair Alan Greenspan has come out saying QE programs did nothing to help the economy and to “buy gold.” Greenspan said that just the mention of higher interest rates created great volatility in the markets, and he expects the process of boosting rates to be no different. The Former chair also said gold would be a great way to essentially hedge the actions of the Fed and government.

The Fed was oblivious to the 2008 crisis as bubbles were ready to pop. History repeats itself.

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