The markets expected only one rate increase in 2019, in line with a downward revision of the economic growth (now revised to 2.3%) along with stable unemployment and inflation rates of respectively 3.5% and 2%. The confusion was exacerbated after the chairman of the Federal Reserve stated that the present target range for the federal funds rate at 2.25% to 2.50% is basically “at the lower end of the range of estimates of the longer-run normal rate provided by the Committee”.
The next weeks and months will tell us if the FED sinned by this excess of optimism, or if this less dove-ish monetary policy stance reflected in part the need of the Federal Reserve board of directors to distance themselves from the executive branch in Washington DC.
This being said, one of the numerous strengths already demonstrated by Jerome Powell is his adaptive mobility, in this instance, his capacity to quickly and drastically switch the language, as seen in November about the neutral policy stance.
Gold mines were down 4% yesterday. This negative reaction was in our opinion extreme because investors preferred focusing on the very short term disappointing news (two rate hikes in 2019 instead of one in an environment of stable inflation) while brushing off the big picture: that these two rate hikes next year will most probably be the last ones in this business cycle! We are as close as can be from an end of the normalization process. The behavior of the USD, which closed flat yesterday was validating the thesis that we are reaching the limits of a more restrictive monetary policy.
Alain Corbani
Head of Mining & Portfolio Manager
Finance SA, Paris France
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