Fed Member Statements Move Gold Price Up Or Down. Should This Be Allowed?

London (Aug 21)  First one US Fed leader says one thing regarding the possibility of a second interest rate hike this year and then another comes up with a different take on the U.S.'s overall economic position and gold and the dollar move up or down depending on what position is being taken.

We have commented before that why the gold price moves to the extent it does on the potential timing of what is likely to be a minimal interest rate increase of perhaps 25 basis points is somewhat of a mystery. (See: Why does gold react so sharply to poss. Fed interest rate rise schedule?) Real inflation is growing at a higher rate than official figures suggest and even if there is a small rate increase, the U.S. will effectively remain in negative rate territory, which is generally positive for gold, but this seems to be being totally disregarded.

Regarding a possible Fed rate increase, possible dates, if the Fed will raise them this year, are September, November and December. We can probably rule out November as the Fed meeting is scheduled only a week ahead of the US Presidential election and the Fed wouldn't want to be seen as doing anything which might be seen as impacting the result for whatever reason.

That leaves next month - probably too early, given the tone of the last FOMC minutes - and a more likely date of December, a full year after the last rate increase assuming economic indicators don't turn down, which they well could. But from a Fed credibility point of view one suspects that there will be added pressure to go for at least a December rate rise and we would rate that as the most likely date even though a number of top rated analysts do not believe the Fed will return to making small rate rises at all until next year - if then.

So what if the Fed does raise rates by perhaps another 25 basis points in December. The biggest worry for the FOMC is perhaps that this will adversely impact general stock market growth. There are many out there predicting a stock market crash as stocks are seen as overvalued and the worry is that it may only take a tiny adverse change in interest rates to trigger the start of a major downturn.

Source: LawrieWilliams