Another Look at Great Federal Reserve Expectations

Swiss Bank UBS AG which last week scaled back its average gold price forecast for the current year by 18% now says that commodities overall are likely to experience a decline in the coming quarter as both the Fed and the ECB refrain from injecting further stimulus into the economies they oversee. Goldman Sachs Group Inc. also cut its 90-day outlook on commodities to “neutral” from “overweight” noting that many a raw material had reached “targets” in Q1.

Both firms appeared to echo the IMF warning issued earlier this week that the commodity-producing nations out there might wish to brace for price declines in “stuff.” UBS also noted that “statements from the Federal Reserve’s Open Market Committee suggest the likelihood of further quantitative easing is minimal. A more durable global economic recovery has heightened concerns about rising interest rates and a stronger US dollar.”

Speaking of such “statements,” no fewer than a dozen Fed official speeches have been delivered this week, and they only served to confuse the investing crowd as thoroughly as possible. The markets could have sprinted into equally divergent directions based on the interpretation of the words coming from Fed Presidents Kocherlakota, Yellen, and Lockhart, or Bullard, Dudley, and Rosengren. And we have not even begun to cover the statements that were made by Fed Governor Tarullo or Fed President [Esther] George.

Many a commodities’ speculator tried to divine hints of QE3 in the pronouncements made by the aforementioned luminaries; some even tried (and succeeded) to push asset prices significantly higher. To wit, gold gained a hefty amount, so did crude oil. As for the Dow, well, it put in its second-best performance of the year. Curiously, it appears that if you ask economists about the prospects for any further significant accommodative steps to be taken by the Fed this year, well, they have a bit of a … different opinions than the speculators who added 1% and 181 points to the price of gold and the Dow, respectively, based on just such anticipation.

Namely, 71% of surveyed economists (by the Wall Street Journal) do not believe that the Fed will take such measures, most of them believe that the Fed will raise rates within about one year, and they also believe that the US economy will continue to grow at the pace that the Beige Book described the other day as “modest to moderate.” What the US central bank’s fawn-colored book actually noted was the fact that certain regions in America (Cleveland, St.Louis) are growing at only a “modest” rate whilst others (Kansas City, Boston, Minneapolis) are showing “moderate” and even “solid” rates of progress on the economic front.

The “moderates” outnumber the “modests” by a wide margin, but at the end of the day, they are all exhibiting growth of the type that should embolden the Fed hawks (Minneapolis Fed President Kocherlakota among them) who wish to depart from the near-zero interest rate environment now in place of the past three years. For now, the Fed will aim to make rate change decisions or asset purchase decisions based on “incoming data” and many suspect that no radical or new Fed programs will be on offer inside of the two weeks left prior to its late April FOMC meeting, or even thereafter.

In the interim, US economic statistics continue to run hot, cold, and everything in-between. Yesterday, the perceptions that the Fed will “help” in some way were bolstered by the highest number of initial unemployment benefits claims in two months (380,000). Ignored inside the report was the fact that the US economy has in fact added an average of 212,000 jobs each month during Q1 and that such figures are well ahead of the averages recorded in 2011. Also apparently ignored is the fact that while overall US unemployment was at 9.1% just last August, it was down to 8.2% last month. The glum buyers of gold and silver thus also ignored the metric that showed US consumer confidence rising and holding at a four-year high last week.

On a final note this morning, certain tremors were reported at the tomb of the very, very late Kim Jong Il after his country’s rocket scientists failed to put a Tiparillo-shaped object (rocket? missile?) into orbit. Either North Korea misread the calendar and thought that July 4th had come around, or the folks with their finger on the “launch" button thought it would be nice to continue the tradition of celebrating the “power” of their regime with such a fireworks show. The rocket, dubbed “Kwangmyongsong” (“Bright Star”) indeed turned into a bright…star of a fiery nature as it disintegrated over the ocean. Back to the drawing board. Final tally: one lost rocket, a bunch of (non-existent) money spent, numerous bruised egos, and the addition to global geopolitical jitters: a big, fat zero. 안녕히가세

Have a pleasant weekend.

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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