Two Fed nominations every gold investor should be aware of

Federal Reserve building. Image from archives.

The delicate balance of forces at the Fed has been disturbed. The doves grew stronger recently, and with new governors coming, their strength may increase even further. Will gold warm up to them?

Goldbug in the Fed?

Trump wants to nominate a goldbug to the Federal Reserve Board. At the beginning of this month, President announced – yes, on Twitter – the names of two nominees to fill vacant posts on the Fed’s Board of Governors. He thought earlier about Herman Cain and Stephen Moore, but they withdrew from consideration in the face of criticism.

Judy Shelton, Trump’s fist pick, is the U.S. director of the European Bank for Reconstruction and Development. She has a doctorate in business administration from the University of Utah and she served as an economic adviser to Trump’s 2016 presidential campaign. And – attention, attention – she has advocated a return to the gold standard. Not so long ago, she wrote in the Wall Street Journal:

It’s entirely reasonable to ask whether this might be better assured by linking the supply of money and credit to gold or some other reference point as opposed to relying on the judgment of a dozen or so monetary officials meeting eight times a year to set interest rates.

Indeed, its’ entirely reasonable! After all, the committee setting the price of any other good would be seen as an absurd. But central planning in monetary sphere becomes somehow justified. Anyhow, Shelton may have difficulty to convince others to link the US dollar to gold. If anything, it seems that Trump convinced her to low interest rates. After the Great Recession, Shelton argued that quantitative easing was a mistake:

It is ironic that concern for wage earners serves to justify money pumping by the Fed that ends up largely benefiting people who have hefty stock-market portfolios, especially at a time when “income inequality” is a major White House theme.

But apparently, she changed her mind and she now supports looser monetary policy. Shelton said in an interview that, if appointed, she would lower interest rates to 0% in one to two years:

When you have an economy primed to grow because of reduced taxes, less regulation, dynamic energy and trade reforms, you want to ensure maximum access to capital.

What a magic transformation from the advocate of the gold standard and the critic of the central banks’ asset purchases into the supporter of the ZIRP! Gold will find it hard not to welcome that.

More doves at the Fed

Christopher Waller, Trump’s second pick, is not a goldbug, actually he is quite z conventional choice. Waller is the Executive Vice President and Director of Research at the Federal Reserve Bank of St. Louis. He has a Ph.D. in economics and previously served as a professor of economics at the University of Notre Dame before joining the St. Louis Fed in 2009. Typical Fed economist, right? Not entirely. Waller is a known dove.

And guess who is his boss? Yes, the St. Louis Fed President James Bullard, who was the only member of the FOMC that dissented as he wanted to cut the federal funds rate already in June. Waller shares Bullard’s dovish views, actually he helped to shape them as Bullard’s mentor, that we live in a new world with low inflation, so higher interest rates are not needed. In a recent interview with Bloomberg, he said:

We didn’t see any overheating in the economy coming, and so the question was, why are we raising rates. We didn’t see any reason to raise rates just for the sake of raising rates.

We are skeptical whether Waller’s views would help the economy. After all, he argues for more of the Fed’s stimulus, although the previous rounds of interest rate cuts and quantitative easing failed to substantially accelerate the economic growth. But his ideas should lend support to the shiny metal. 

Implications for gold

Although they have completely different background, it seems like both Trump’s nominees  are going to be in favor of lower interest rates. This is why President picked them. He is not satisfied with Powell, so he decided to fill the vacancies within the Fed’s Board of Governors with much more dovish people.

It’s nothing but fundamentally good news for the gold prices. The Fed has already a dovish bias, which results from its asymmetric approach to monetary policy (it cuts rates aggressively when faced with crises, but hikes them only gradually thereafter). After Clarida’s arrival, the Fed becomes even more dovish. And with two additional doves at the FOMC, the U.S. central bank could become colloquially known as the Dove Reserve Bank.

The recent dovish turn has coincided with gold’s jump above $1,400. Both Shelton and Waller have to be yet confirmed by the Senate, so they will not affect the short-term outlook for the gold prices. But they could support them in 2020. Possibly with Christine Lagarde, who was nominated to be the next President of the ECB, but this is topic for another Gold News Monitor.

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

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