What did the Federal Reserve say yesterday that caused gold to rally over $1,700?
The US Federal Reserve surprised the markets on Wednesday by saying that interest rates could stay at historic lows until late 2014. The new commitment replaces the statement that economic conditions were likely to stay at the range of 0% to 0.25% until at least mid-2013.
In a press conference, Chairman of the Fed Ben Bernanke said that the 2014 forecast is simply the central bank’s “best guess.” He said the Fed’s ability to forecast that far out is limited, and that it could adjust the time frame if economic conditions change. Still, he added, all signs suggest the Fed won’t change its record-low rate for nearly three years. “Unless there is a substantial strengthening of the economy in the near term, it’s a pretty good guess we will be keeping rates low for some time,” Bernanke said.
Investors are assuming the Fed is extending their forecast because the central bank sees more problems coming across the Atlantic as Europe struggles with its debt crisis.
That is why the Fed left open the possibility that it might ease monetary policy further. In the statement released after this week’s meeting of the bank’s Open Market Committee, it said ” The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
More stimulus from the Fed would likely come in the form of a third round of quantitative easing (QE3). QE3 would likely jolt the US economy but it would also result in higher inflation. In that scenario, stocks and precious metals would benefit greatly.
Due to the prolonged forecast of extremely low rates and the reiteration that the Fed might ease monetary policy further, the Dow and S&P 500 rallied by more than 1% after the FOMC statement was released yesterday. Even more impressive was the rally in precious metals: gold moved up about $35, topping $1,700 an ounce for the first time since December 9th and silver jumped $1.15, or 3.6%, to settle up to $33.12 an ounce.
What do you think? Do you support the Fed’s decision to prolong ultralow rates through 2014? Do you think it will cause the stock markets and precious metals to rally even more? Join the discussion below!
In terms of juicing the economy, the QE efforts have benerally been a failure. They've been successful at juicing the markets though. No wonder since the aim of the QE efforts have been to support the banking sector, which is responsible for about 70% of the rading on the US exchanges.
To my mind, a third QE EFFORT only suggests substantial structural difficulties which I think is reinforced by longer-term holding down of interest rates.
It could juice the markets for awhile, but lookout for the crash that follows.Right now, it looks like we're setting up in the markets like the topping action in 2007. Markets keep going up but on less and less volume and fewer and fewer stocks participaitng in the rise. And everyone knows what happened after that!
Bernanke should be impeached for waging a relentless war against savers and the US$. Although his extended interest rate forecast might temporarily fuel speculation, it might well lead to an eventual stock market crash. His statement about savers being able to maintain their purchasing power by investing in CDs at these artificially low rates is ridiculous. As a Canadian, all I can do is send emails to the Fed Reserve pointing out the folly of Bernanke's policies. However, you as Americans can write your Congressmen and Senators about reigning in the power of the Federal Reserve which at this time operates without meaningful oversight.
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