Will the Fed Fumble at the End of the First Quarter?

It’s that time of year again.  As I write, the Fed is in the first day of its second of eight regularly scheduled meetings for 2016.  In the last several years these meetings have ended with almost no surprises.  Given its reluctant accommodation of political and media pressures, the Fed inevitably manages to leak results of each meeting of the Federal Open Market Committee (FOMC), the committee that makes decisions on rate hikes and expansion of the money supply, just before the end of the first day.  It’s like an office romance – what the key players think of as big news is really old hat to veteran observers.

In this spirit, Reuters, along with most other big media sources, has announced we’ll likely wind up with no increase in short-term interest rates.  Once it became apparent reduced economic growth in China and Europe could have a negative effect on our own economy, the Fed Board of Governors thought it best not to hit us with an encore to last December’s rate increase just yet.

Fed Chair Janet Yellen and her colleagues needed to see at least some inflation to consider a rate raise this time around.  Such inflation at this juncture would represent a welcome signal our economy is growing.  While policymakers detect a bit of inflation driven by skyrocketing rents, the official figures don’t support enough of it in the economy at large.

That said, not every Fed watcher concludes Yellen will necessarily make a lukewarm statement about the economy tomorrow. BK Asset Management managing director Boris Schlossberg thinks we could be in for a hawkish surprise.

“I think given half a chance, they’re going to surprise the market,” BK Asset Management managing director Boris Schlossberg said Monday on CNBC’s Trading Nation.”If they say something [hawkish] Wednesday, I think it’s going to give a boost to the dollar – which has been badly, badly beaten up on the assumption that the Fed is going to do nothing for the rest of the year.”

In other words, much depends on what happens to the dollar. If the Fed can somehow alter market sentiment and drive the dollar upward, it will successfully condition expectations for rate increases later in the year. Investors hungry for interest income and brokers who cater to them will then become happy campers.

If you’re a gold aficionado, you’re aware contrarian wisdom portrays the yellow metal as riding for a fall. Given a Fed increase in rates and the possibility of interest income in the not-too-distant future, investors will back away from gold.

But don’t bet the farm on that tired, old story.  For as The Week observes, “…The trend this year is clear and the reduced chances of rates rising is a bullish indicator [for gold] as tighter policy tends to boost the dollar and income-generating rival assets.”

Furthermore, the same article points to mushrooming demand in emerging countries like Vietnam, Malaysia and Indonesia – demand that is causing the price of gold to persist in its upward climb.  Furthermore, supplies of the yellow metal are sliding.  According to the World Gold Council, the global supply of gold fell four percent to a six-year-low in 2015.

But don’t make the mistake of playing an economic connect-the-dots game. Don’t try to outguess the pros who don’t know what they’re going to do themselves from one quarter to the next. While the Fed Board of Governors holds its cards close to the vest, all this uncertainty underscores the fact that both your regular investment and your retirement portfolio (yes, your IRA/401(k) is a portfolio) still need the security and protection only physical gold can provide.