Despite Fed's growing taper talk, it "has been mumbling about 'exit strategies' since 2009"Gold fell
more than 1% Wednesday, settling under $1,310, on news that Janet Yellen
will be nominated to replace Federal Reserve
chief Ben Bernanke
, and silver followed suit, dropping below the $22 level.
The dip in metals is surprising given Yellen's reputation as a monetary-policy dove and torchbearer of Bernanke's easy-money programs. However, the minutes of the Fed's September policy meeting, released later Wednesday, suggested to many investors that the central bank is on track to taper stimulus soon.
"It might be counterintuitive that the dollar rose on news that a dove is likely to be the next head of the Fed, but the news itself removed some of the uncertainty, and therefore contributed to risk-on sentiment," said Ayako Sera
at Sumitomo Mitsui Trust Bank
Many investors also are assuming that the debt and budget battles will be resolved before calamity strikes. "Almost everybody thinks that it will be solved and there will be no default, but still people are nervous," said Bill O'Neill
of LOGIC Advisors
. "There is a certain caution in people's mind, and that's why there's no aggressive selling pressure (on gold). ... You're certainly not going to go short against it." "The Yellen Fed will print money forever"
In the long run, though, Yellen's appointment will be gold-bullish because she has expressed her willingness to intervene in the bond market to generate jobs in the U.S. Indeed, London's Telegraph
newspaper sardonically screamed
: "Rejoice: The Yellen Fed will print money forever to create jobs."
As the Telegraph's Ambrose Evans-Pritchard
noted: "The Fed will be looser for longer. The (Federal Open Market Committee
) will continue to print money until the U.S. economy creates enough jobs to reignite wage pressures and inflation, regardless of asset bubbles, or collateral damage along the way."
Many analysts agree that more money printing -- or at least caution on initiating tapering -- is likely from Yellen, particularly as the Washington fiscal battles rage:
"Markets are focused on the political fight and are also sensitive to the damage each day of the political fight does to the U.S. economy," said David Kotok
, chairman and chief investment officer at Cumberland Advisors
. "Yellen knows this. She cannot do anything about it except to proceed slowly on any tapering."
"Markets are giving Yellen the thumbs-up, counting on quantitative easing being maintained at full pace until further notice," said Sean Callow
, senior currency strategist at Westpac
. "It's a notable reaction given Yellen's nomination was so widely expected and that it comes at a time markets are already assuming the Federal Open Market Committee will not seriously consider a policy change at the October meeting given the fiscal standoff."
Yellen's appointment "suggests that the Fed is going to continue with a dovish policy," said Peter Cardillo
, chief market economist at Rockwell Global Capital
. "I'm calling for them to perhaps begin scaling back [quantitative easing] slightly in December, but a lot of that depends on the outcome of the Washington shutdown and above all the debt ceiling. ... If the impact of the Washington shutdown weighs more heavily on the economy, that could push it back until the first quarter of 2014."
"Yellen probably won't seek an exit from an accommodative policy immediately," said Koichi Hamada
, an adviser to Japanese Prime Minister Shinzo Abe
"She's even more of a dove than Bernanke is, but there's nobody who can say she's not credentialed because of the range of experience she's got," said J. Alfred Broaddus
, a former president of the Fed's Richmond branch. "She has experience that almost nobody else can bring to the table at this point."
"In the face of improving (economic) figures but looming uncertainty, markets can expect Yellen to continue with a cautious hand on the tiller," said Anne Richards
, chief investment officer at Aberdeen Asset Management
"She is fundamentally committed to continuity, that we still have a problem and we still need monetary policy to be doing a fair amount," said Christina Romer
, a former chairwoman of the president's Council of Economic Advisers
"She's just entirely too easy money," noted investor Julian Robertson
said Monday, warning that her tolerance of inflation could lead to excesses like the run-up in house prices that led to the financial crisis. "I think we've got to remember that we're not very far from the last bubble bursting." Tapering: Despite minutes, don't hold your breath
Meanwhile, Zero Hedge commented
that the September FOMC minutes
show that "in a nutshell -- the Fed is all over the place!"
The minutes said the FOMC remained concerned about "mixed" economic data, such as a stubbornly-weak labor market and setbacks to the U.S. housing recovery; tightening financial conditions; and political strife in Congress. Indeed, the budget impasse in Washington was a key reason why the Fed held off on tapering.
FOMC members looked to signal to market participants that the central bank is "prepared to be patient" in its plans to trim its vast bond-buying program.
Labor market conditions have "improved meaningfully" since the latest round of bond purchases began in September 2012, the minutes state. But the FOMC members conceded that much of the reduction in the headline unemployment rate was caused by large numbers of people leaving the workforce rather than large numbers of new jobs created.
Thus a decline in the unemployment rate "might overstate the degree of improvement in broader labor market conditions."
Rising mortgage rates were also a factor in delaying the Fed's decision to reduce its $85 billion-a-month bond-purchase program. Some members "expressed concerns that tighter financial conditions might weigh on the recovery in the housing sector," according to
So, will the Fed taper or won't it? Will it taper this year or next? We don't know, but it's caught in a trap: If it tapers too soon, it risks snuffing out the weakest economic recovery in U.S. history. If it tapers too late, bursting asset bubbles and runaway inflation might erupt.
Despite some fresh noise in the minutes about members favoring tapering this year, we'll believe it only when we see it. As Pater Tenebrarum
of the Acting Man
: "All that 'speculation' about the 'end of QE' and even a mere 'tapering' has so far turned out to be 100% wrong. ... The Fed has been mumbling about 'exit strategies' since 2009 and has instead vastly increased its 'QE' programs. Meanwhile, since 'QE to infinity' has so far not helped gold to rally, why should a slight deceleration thereof mean anything? As to the 'U.S. recovery' -- it remains a sorry sight indeed."