Silver spot price gains on insider pointers as to Fed’s next easing move

Washington (Nov 6)  The most senior staff economists for monetary policy analysis and macroeconomics at the US Federal Reserve, William English and David Wilcox, have prepared separate presentations for the IMF’s annual research conference that starts tomorrow. The two research papers, made available publicly yesterday, imply a strong case for a reduction in the 6.5 percent unemployment threshold as a prerequisite to the first rate hike of the US central bank.

Currently the Fed’s monetary policy is virtually overseen by the ‘Evans’ rule’, which says that raising the cash rate will not be even considered by policy makers until either the jobless rate drops to 6.5 percent or inflation rises to 2.5 percent.

If the Federal Open Market Committee agreed to trim the unemployment threshold, the decision would be characterised as easing because borrowing costs will stay at rock bottom for a longer time. According to Aurelija Augulyte, senior FX analyst at Nordea Markets, a “lower unemployment threshold even with taper will be USD negative”, possibly explaining why the silver spot price has found such strong support so far today.

The baseline expectation at Goldman Sachs is that the FOMC will cut its 6.5 threshold to 6 percent at the March 2014 meeting, alongside a first tapering of QE. Senior GS economist Jan Hatzius has been saying for some time that a reduction in the jobless objective is the Fed’s preferred method of easing because an increase in the pace of bond buying could lead to financial distortions and asset bubbles.

Hatzius also thinks that the easing measure could be announced as early as the December FOMC meeting and if so, “this might also increase the probability of an earlier tapering of QE.”

According to Hatzius, US output and the labour market remain well below potential, while inflation in the United States stays stubbornly below the Fed’s target. The charts below illustrate how an alternative lower unemployment threshold could lift inflation expectations, while enhancing the jobs market in the US.