The FOMC concludes their two day meeting today and will announce if they will reduce their monthly asset purchases from $85billion ($40bn MBS and $45bn Treasury’s). It is the final meeting for Ben Bernanke the current Chairman of the Fed, with his successor expected to be hawk Janet Yellen.
At 7pm GMT the interest rate, economic projections and most importantly the level of asset purchases will be announced. In the Bloomberg survey of economists, 35% expect the Federal Reserve to announce a smaller amount of asset purchases this month.
No Taper Scenario
Previously the market believed that the Fed would taper, and upon release that this wasn’t occuring, markets moved drastically to reposition. The economic stimulus has given a lift to US equity markets, which have recently printed all-time highs, if the stimulus remains, indices should be bid.
When QE began initially Gold was seen as partly a safe haven, but also a hedge against inflation and was bid. In recent months Gold has suffered from the speculation of a taper. If the Fed doesn’t Taper today, it is likely that the precious metal will be heavily bid, with the $1300 price a possibility.
If the Fed Does Taper
If the Federal Reserve, does finally begin to reign in the economic stimulus, the amount will be key. The Fed will still be purchasing assets each month, though it will be less than previous months. A reduction by 0-$5bn, would be a sign, rather than having any significant economic impact on the US economy. A reduction by more than $5bn, would signal to the market, that the Fed believes the US economy is strong enough to have the training wheels taken off. This will be the final meeting chaired by Bernanke and there is uncertainty as to how his successor will act.
To start tapering now might ease the transition from Bernanke, though upon the release there is an expectation of significant volatility.
Current Gold Price:
What is Fed Tapering?
Tapering of quantitative easing is the reduction from the current level of monthly asset purchases complete by the Fed, currently this stands at $85bn. The Fed will continue to purchase assets each month; however the amount of these would be reduced. The timeframe and scale of tapering will have a significant impact, and the Fed may refrain from starting today.