GoldPrice.

Analysts expect that the FOMC is almost certainly going to remain on hold for this week’s meeting, as they will most likely reiterate previous comments about data dependence and patience when it comes to further rate hikes. The balance sheet will be the big focal point for Wednesday’s meeting, however not much is expected in terms of formal changes to the balance sheet policy. We do expect Chairman Powell to emphasize that the balance sheet strategy is flexible. The government shutdown will most likely not be addressed in this meeting.

Rate Hike Outlook

The market is virtually certain that there will be no rate hike at this week’s meeting. However, we do expect to get some insight into the chances of further rate hikes throughout the year and the timing of those hikes. Fed comments have indicated that they are concerned about the global economy, growth prospects, and the housing market.

On the flip side the Fed is happy with the employment numbers and sees stable inflation. In 2018 there was a need to raise interest rates as the economy was “running hot” (growing above trend). Since the December meeting, Fed officials Williams, Clarida, Powell, Rosengren and Kaplan, have made separate statements stressing the need for patience when it comes to further rate hikes.

Officials have also emphasized data dependence when it comes to making further decisions. Fed officials have indicated that growth has slowed to normal levels and there seems to be less need for further rate increases.  We would expect the themes of patience and data dependence to come into Wednesday’s statement. December’s minutes showed that several participants petitioned to remove the hiking bias all together.

Balance Sheet Outlook

The balance sheet will be the focus at this week’s meeting, though we do not expect the FOMC to make formal changes to its current plan. Most investors are focused on a few potential changes.

As it stands now, the Fed is slowly reducing the size of its balance sheet by not reinvesting the proceeds of the maturing bonds. In the presser following the December meeting, Powell stated that the plan to reduce the balance sheet will continue on autopilot. The runoff of the Fed’s balance sheet has the effect of undoing Quantitative Easing, which injected more money into the markets. As the Fed’s balance sheet runs off there is less money in equities and fewer dollars in play. And fewer dollars means a stronger dollar.

One possible outcome is that the FOMC could revise the June 2017 addendum to the Policy Normalization Principles Plan. Currently it says that “a material deterioration in the economic outlook” and a large reduction in the fed funds rate would be needed to resume reinvestment. Powell has begun to hint that the plan could be modified. The Dollar was down after his comments as this became a potential outcome.

We most likely will not see comments about changing the current balance sheet policy in Wednesday’s prepared statement, if we do, expect the dollar to take a big hit. Most likely Fed Chair Jerome Powell will address changes to the balance sheet policy during the Q and A, if this is the case, expect the dollar to take a small hit as this is mostly priced in. There is also a chance that Powell will continue with his autopilot comments, in this case expect the dollar to catch a slight bid.

How Should Gold and the Dollar Respond

The focus of this week’s meeting is the balance sheet and gold investors should keep a close eye on the potential outcomes. If the Fed starts to reverse its position on the balance sheet, we will see the dollar sell off and gold catch a bid. It’s important to note that these comments in the statement would cause the move to be stronger than if they were mentioned during the post meeting Q and A. However, analysts believe seeing these comments in the Q and A is far more likely. If Powell reiterates the autopilot comments, gold will sell off on the dollar weakness. This outcome is more likely than reversing the autopilot comments in the statement, but less likely than reversing the autopilot comments in the Q and A.

One other thing I have noted in previous articles is that gold had been negatively correlating with the equity markets. In the past, when we see markets in turmoil, we typically have seen gold outperform (negative correlation). Over the past few months when the stock market would take a hit, we would see gold catch a bid and vice versa. This week we have not seen much correlation between gold and the market. The one correlation that seems to hold true over the recent past is golds correlation with the dollar. Keep an eye out during the meeting as the dollar is expected to move and push gold in the opposite direction.