We can put aside, then, monthly purchases of securities. Now the big questions to be faced by the Fed are the questions of “monetary policy normalization”. That is – how do we get out of the current boosted balance sheet and absurdly low interest rates without panicking the market, which has flirted with over-indebtedness for a long time? What do we have to hear about that?
Participants also discussed the appropriate time for making a change to the Committee's policy of rolling over maturing Treasury securities at auction and reinvesting principal payments (…)
Regardless of whether they preferred to introduce a change to the Committee's reinvestment policy before or after the initial tightening in short-term interest rates, a number of participants thought that it might be best to follow a graduated approach with respect to winding down reinvestments or to manage reinvestments in a manner that would smooth the decline in the balance sheet.
Here is where it gets interesting. The Fed is emitting two signals with these minutes. First of all, it reminds us that there is such a thing as non-zero interest rates (positive), which can be set by the central bank. Second of all, it reminds us that the central bank does not have to be a pawnshop of last resort, which increased its balance sheet to dangerous levels. Two adjustments need to be made for the market economy to function as regular and the Fed is aware of that. The interest rates have to go back to positive levels, and the balance sheet of the Federal Reserve has to be significantly decreased. Things are not normal yet, and there is a long, bumpy road ahead.
What are the conclusions to be drawn from minutes for the gold market? This time the Fed appears to sincerely believe that better times are back on the horizon. Naturally the Fed constantly tries to assure us that good times will soon be back, but for the last couple of years one could see them as a sort of masquerade in order to boost optimism in the markets. Right now the statements appear as more honest; the members apparently believe in the recovery more. The big question is: do the good times herald bad times for gold? Not necessarily so. At lot of speculation about gold as an absolute substitute for paper dollar assets has burst with the last gold meltdown from the previous year. Just as gold, during the Greenspan bubble, was a good asset, similarly gold does not have to be unwanted during the slight recovery we may experience. And let us add: a recovery about which we remain suspicious.