In Monday’s “In the Lead” we alluded to the fact that when and if the Fed does any kind of further accommodation, it might only be as a result of significantly unpleasant US economic statistics and that if a new QE ship is actually launched, that it would be one that has been “sanitized for your (inflation) protection.” On Monday, certain clues to the Fed’s stance were fairly easy to divine by simply following one or two of its members in action. Dallas Fed President Fisher went on CNBC and said that while “it’s a little bit premature to talk about tightening” it is also the time to begin to consider that the Fed is done with easing.
Mr. Fisher then went on to note that he thinks that “the easy part for those that just rode on the jet stream of Federal Reserve accommodation is over now. Now they actually have to do the work, to do their analysis.” Part of said analysis is to figure out how much certain commodities might be worth if the Fed’s easy money had not been at some players’ disposal and if the “buy everything” syndrome had not afflicted so many fund managers. On the same day, St. Louis Fed President Bullard cautioned that, owing to global factors which could keep US inflation levels at higher than those warranted by the relatively slow pace of US economic recovery, further easing is not something he would go along with.
Similar, very telling “smoke signals” from the Fed were actually out there even earlier than yesterday however. For instance, last week, just hours after everyone got carried away with their bullish bets owing to sugar-coated visions of a certain-to-soon-be-launched QE3 (based on perceptions of what Mr. Bernanke said in a relatively unimportant speech), Richmond Fed President Lacker (also appearing on CNBC) flatly stated that US economic conditions were/are likely to pick up enough “steam” in order for the Fed to need to raise interest rates next year, and not at the end of 2014, as is still being assumed by many, too many.
Yet another Fed policymaker, Atlanta Fed President Dennis Lockhart, speaking yesterday on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays, chimed in on this most important topic and remarked that he “would have to see some pretty severe circumstances before [endorsing] another round of quantitative easing. The [US economic] outlook is positive enough that I am not sure I see the need for it.”
The bigger issue here (and it certainly applies to gold as well) is that certain market players not only cannot live with the idea of rate hikes by the Fed, but that they cannot even stomach the concept of a “neutral” Fed that simply remains on hold. This is generally what happens when drug addicts need larger doses of ‘more of the same’ just to get the same level of “kick” they have become habituated to. Thus, we witnessed stock, oil, and precious metals market players throwing “tantrums” of varying intensities on Tuesday after the Fed merely hinted at cutting back (and eventually off) on the supply of market “marching powder” that it had so generously been doling out since 2008.
Thomson Reuters’ “Inside Metals,” in its most recent report, notes –and this is quite the observation that most hard money newsletter ‘producers’ really need to take note of- that “the gold market has been showing increased sensitivity towards inflation fears during early 2012, as it has become ever more attentive to statements, or inferences from statements, of Federal Reserve Board Chairman Bernanke. What could be seen as significant is that price falls in response to benign inflationary sentiment have been larger than any gains on heightened inflationary fears.” Great expectations can lead to greater disappointments.