Gold Price Forecast Brightens amid Drop in US Treasury Yields

Daniel Fowler
March 21, 2019

The Fed also said it would ease back on its sell-off of its bond holdings by lowering its monthly cap from $US30 billion to $US15 billion.

Also in December, Fed officials had indicated there would be two 0.25-percentage-point hikes this year in the short-term federal funds rate, a benchmark for credit cards, auto loans and other short-term consumer lending.

The U.S. Federal Reserve announced to leave interest rates unchanged after concluding a two-day policy meeting Wednesday afternoon.

Benchmark 10-year notes last rose 25/32 in price to yield 2.5245 percent, from 2.612 percent late on Tuesday.

"'Patient' means that we see no need to rush to judgment". Employment, retail sales and business fixed investment are all growing more slowly, Powell added.

The economic projections released on Wednesday showed policymakers at the median see the US economy growing only 2.1 percent in 2019, a full percentage point below the roughly 3 percent growth that was seen in 2018 and which the Trump administration contends will continue.

By September, the US central bank said its current practice of allowing up to $50 billion of Treasuries and mortgage-backed securities (MBS) to roll off its balance sheet each month will come to an end if the economy evolves "about as expected".

"It definitely skewed on the dovish side of expectations", said Evan Brown, head of macro asset allocation strategy at UBS Asset Management in NY.

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Developments in the trade talks between the USA and China helped pull the market lower earlier in the day. Some analysts believe the next rate move could be a cut later this year if the economy slows as much as some fear.

The combined announcements mean that, after tightening monetary policy with two levers at once over the past year, the Fed is now pausing on both fronts to adjust to weaker global growth and a somewhat weaker outlook for the US economy.

The outlook is now also in line with President Donald Trump's criticism of Fed rate hikes as endangering the recovery, though for the awkward reason that Fed officials do not see his policies having a lasting impact on growth. "It's a great time for us to be patient".

Coming into this week, US Treasury yields already looked like they were wanting to break lower. -China trade relations. If they continue to raise concerns then flight-to-safety buying of the U.S. Dollar could put a lid on any gains produced by the Fed decisions.

In its second meeting of the year, the committee said "growth of economic activity has slowed from its solid rate in the fourth quarter", as household and business spending is expected to drop off and annual inflation has declined.

But the hint that we should no longer think in terms of any rise at all this year and only one in 2020 is consistent with the picture of a softening economic outlook.

Inflation, the FOMC's minutes said, should come in at just 1.8 percent this year and 1.9 percent next year, below the Fed's "symmetric" inflation target of 2 percent. A defensive allocation on an unhedged currency basis can sling shot performance should the $AUD depreciate, as we have seen in many previous risk market drawdowns.

That reflects a slow start to 2019, with the Atlanta Fed's tracking estimate of growth at less than 1 per cent, as well as continuing headwinds, from a battle over trade tariffs and the delayed impact of past rate hikes.

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