After early this week, President of the Federal Reserve Bank of San Francisco John Williams hinted at the possibility of increasing the target level of inflation, which would allow the Fed to keep interest rates low for a long time, the US dollar declined significantly against most rival currencies on the foreign exchange market. The US dollar fell to its lowest level since June. Consumer price index (CPI) in the US that was published yesterday remained unchanged in July, showing that inflation remains moderate. Earlier last week the US also saw quite weak data on GDP and workforce productivity in Q2.
Altogether this gives the impression to the majority of market participants that the Federal Reserve is unlikely to raise interest rates in the US in the coming months in the context of low inflation and weak GDP data, despite the relatively strong performance of the labor market in the US. The markets estimated the probability of a rate hike in September as 18% with a 51% probability of the Fed tightening policy in December.
However, the markets may underestimate the Fed's determination as to the issue of the rate increase. President of the Federal Reserve New York William Dudley said yesterday that the country's economy will strengthen later this year and presidential elections in the US will not affect the Fed's decision on interest rates.
Another representative of the Federal Reserve, President of the Federal Reserve Bank of Atlanta Dennis Lockhart said yesterday that the reasons for raising interest rates in September have become increasingly compelling. According to him, the meeting of the Federal Open Market Committee (FOMC) scheduled for September 20-21 will consider new incoming macroeconomic data and the intention to raise rates. Lockhart also said that "there is a probability that this year the Fed will raise rates twice." "Next year we will raise rates twice or even more," said Dennis Lockhart.
Statements of the Fed sounded a discordant note and as a warning to market participants, which suggests further weakening of the dollar.
In the context of an increase in the interest rates in the US, precious metals are losing their investment attractiveness, as the cost of their purchase and storage is growing, and precious metals themselves do not generate revenue. Compared with gold, silver has an important factor supporting the demand for it, since It is raw material for the industry, and during the recovery and growth periods of the industry the demand for this precious metal increases.
Today, investors are waiting for the minutes of the Fed meeting held on July 26-27, which will be published at 21:00 (GMT + 3). If the minutes signal the possibility of a rate hike in September, the dollar will strengthen sharply on the currency market. But a more restrained rhetoric of the FOMC contained in the minutes might also fail to strongly influence the emerging downward correction in the prices of precious metals, including gold and silver.
Either way, the Fed is going to stay the course of gradual tightening of monetary policy in the United States. The only questions are the pace and the terms.