The Federal Open Market Committee ended Wednesday afternoon with a statement that showed no interest rate change, as expected. The statement said the Fed will start to shrink its balance sheet by $10 billion a month starting in October. That rate will progressively increase. The tone of the statement suggested there is still a good chance the Fed will raise U.S. interest rates in December. The marketplace read that as favoring the monetary policy hawks. The daily close in precious metals showed a gain in gold of $5.80 to settle at 1316.4 per the 12:30 (CST) settlement. Silver saw a higher close for the session as well at 17.33. As of this posting December gold is trading 1303.8 down over $12.00 in the after market while silver has fallen over 14 cents trading at 1719.0. Subsequently the Dollar has rallied over the 92 handle making a daily high of 92.49, up over 80 points on the session. The metals selloff and Dollar rally began shortly after the Fed announced it will begin to unwind its $4.5 trillion in holdings of U.S. Treasury bonds and mortgage-backed securities in October by cutting up to $10 billion per month from maturing securities it reinvests. This amount will increase by $10 billion every quarter to a maximum of $50 billion per month until the balance sheet declines by at least $1 trillion.
The central bank added that it still sees at least three rate hikes next year, but said it estimates only two rate increases in 2019 and one in 2020. The Bank also downgraded its long-term “neutral” interest rate from 3% to 2.75%. “The labor market has continued to strengthen … economic activity has been rising moderately so far this year,” the Fed said in a statement, adding that inflation will be watched “closely.” Economic projections remained largely unchanged for the next couple of years. GDP is estimated to grow at 2.4% in 2017, 2.1% in 2018, and 2% in 2019. The unemployment rate is expected to stay at 4.3% this year, and then fall to 4.1% in 2018, and remain there in 2019. Inflation is projected to run under the Fed’s 2% target in 2018 and only reach it in 2019. In my view the Fed announcement didn’t have a lot of surprises, but markets are reacting to the news of a possible third-rate hike this year along with aggressive raises next year. While its most likely premature to take such predictions for rate increases that far out seriously, the market is purely reacting to the headlines. Those who bet wrong into the FOMC statement liquidated following the commentary while other metal longs will be out tomorrow. Targets for the downside include the 50 day moving average at 1288.0 and below there at 1283.2 which is a 50 percent retracement of the summer rally. Resistance is up at 1314.8 and with a close over 1329.7 is next.
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