Gold opened quietly upward this morning trading near yesterday’s closing price until Chicago Fed Governor Charles Evans made comments to CNBC which caused the price to jump over $40 per ounce. In an interview this morning, the voting member of the Fed’s Open Markets committee (the committee which votes on monetary policy) told CNBC reporters that the Fed needs to be more aggressive with its policies.
More specifically, Evans called for quantitative easing programs to continue until the unemployment rate has fallen from 9.1% to below 7% or until core inflation reaches 3%. “Strong accommodation needs to be in place for a substantial period of time. If we could sort of make everybody understand that this is going to be in place for a longer period of time, we could knock out some of that restraint that comes about when people talk about premature tightening. If these comments are any indication of the direction the Open Markets committee might take next month, it could mean another serious blow to the dollar which bodes well for gold prices.
Though Fed Chairman Ben Bernanke was silent on the topic of a third round of quantitative easing last week, he left the door open for a more lengthy discussion on the topic at the Fed meeting next month. As today’s comments come only weeks after the Fed’s unprecedented decision to commit to near zero interest rates for the next two years, a relatively clear picture of the Fed’s priorities is coming into focus. From the first two QE programs to the latest announcement about interest rates, there seems to be nothing the Fed won’t do to bolster growth, even at the expense of the dollar. By all accounts, they seem to be telling the markets that monetary policy will be forged to boost the economy where inflationary pressures will be largely ignored. In this environment, there simply isn’t a good argument against higher gold prices.
Given the way the economy is growing and inflationary pressures are not nearly as strong as a lot of people think, I think that there's room for accommodation, Evans continued in his CNBC interview. As long as medium-term inflation stays below 3 percent we could continue to have a low funds rate.
Of course the only problem with this argument is that it’s based on the assumption that by turning off the faucet of easy money when inflation does show up that the problem can be instantly stopped. Is it reasonable to think that by stopping the printing presses when core inflation hits 3% that the problem will simply go away? Keep in mind that it’s taken years of loose monetary policy and trillions of dollars of stimulus money to set the inflationary stage. While some Fed analysts may think they can hit the kill switch and stop inflation in a day, the markets disagree. Gold at $1830 this morning is a testament to that fact.