This morning’s comments out of Jackson Hold provided little reassurance to financial markets as Fed Chairman Ben Bernanke did not hint toward another round of bond purchases. Stocks opened slightly lower, awaiting affirmation that the Fed would take further steps to stimulate short term economic growth. That news did not come, as Bernanke effectively punted on the topic of more quantitative easing.
This in and of itself does not come as a surprise. The Fed’s current portfolio of US Treasury bonds and mortgage debt has topped $2.5 trillion. Another way to look at it is to say that that’s the amount of money they have effectively “printed” to combat the financial crisis over the last 3 years. This has yet to show the long term positive effects the Fed had hoped to see. Second quarter growth numbers were revised down this morning to 1%, which is an even more anemic number than most analysts expected. At the same time, producer prices have risen sharply, raising concerns about coming inflation.
The Fed is in a tight spot. If they do not continue with more stimulus, the economy will likely fall back into recession. If they do institute another round of easing, they will surely contribute even more to inflationary pressures. So in this light, Bernanke’s decision to buy time makes perfect sense. Keep in mind that it’s been barely a month since the Fed’s last major policy announcement regarding their intention to keep interest rates at near zero for another two years. It’s also worth noting that the September Fed meeting has now been lengthened to two days. My guess is that Bernanke still intends to produce more stimulus later this year, but is hoping for a bit of luck in the form of better economic data between now and the next meeting. Better numbers over the next month may save the Fed from the precarious position they are currently in.
The problem is that there is little in the way of positive economic data to be found. With the downward revision of Q2 growth numbers, increasing inflationary pressure, and more bad news out of Europe this morning, there doesn’t seem to be much that will improve the general US economic picture over the next month. Though they may hold off as long as possible, the Fed will likely be forced either to institute another round of bond buying, or to come up with some other form of stimulus. Either way, it equates to printing more money, which will be price positive for gold.
What’s very interesting about this morning’s events is that gold actually opened sharply higher and has continued to gain strength even after the inaction from the Fed. Spot price is currently trading around $1790 per ounce, nearly $20 above yesterday’s close. A hint toward more easing on the part of the Fed would surely have been a boon for the gold price, but we’re seeing strong upside movement even without that policy announcement. Clearly the gold market doesn’t think this morning’s speech was the end of the age of quantitative easing and money printing. If there is one thing we know about gold these days, it’s that we probably shouldn’t bet against it. Gold is the one market that’s had it right for the last decade, while everything else has been a relative mess.