The Federal Reserve signaled it could start scaling back asset purchases this year, but left the door open to extend stimulus if the economy needs it – keeping its options relatively open for extending ‘emergency covid funding’ money printing measures.
More importantly, the Fed highlighted that interest rates aren’t going to liftoff from zero soon. Fed Chair Jerome Powell said, “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest-rate liftoff.” This is important because the Fed attempts to engineer negative real interest rates, so that the cost of borrowing and the interest expense for the U.S government’s mammoth debt is effectively paid off by holders of U.S Dollars (when taking inflation into account).
As a result, the U.S Dollar declined after the announcement, and U.S Treasury yields increased – the market signalling that investors holding U.S dollar bonds need to be more adequately rewarded for taking this ‘hit’. The U.S 10-year treasury bond yield jumped more than 2% to c.1.335% and the dollar declined slightly.
Gold prices sank slightly to two-day lows of $1,760/oz on the news, before steadily paring the losses to recover back to the $1,770 level. Overall, the gold price seems slightly exhausted – looking for either stronger demand, or more substantial economic news that could bring back either risk-on or risk-off sentiment strongly.
The yellow metal was last seen trading at $1,769/oz