Gold prices are getting a boost a day after the Federal Reserve decided to keep interest rates the same. On Thursday gold futures rose for another session shooting past the $1300 barrier it broke just in the previous trading session. Gold for August delivery jumped up by 1.9% to $1,313 an ounce. While gold was pushed higher the U.S. dollar dropped lower against a basket of other currencies. Gold and the dollar typically have an inverse correlation because the standard for valuing gold is based on the U.S. currency.
Loose Monetary Policy
The Federal Reserve says that it expects “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” Recently the St. Louis Fed President Jim Bullard, in a bearish statement, said that low growth and a very low fed funds rate will “likely remain in place all the way through 2018.” Bullard, reversing earlier forecasts that looked for growth to pick up and rates to rise, now says 2 percent growth is the most likely forecast and that rates will remain low. Bullard also believes that unemployment will remain around 5% and trimmed-mean PCE inflation of 2 percent during this window. The current target rate is 25 to 50 basis points. The Fed will meet again in July but expectations are low for any action on interest rates. In the beginning of the year many pundits believed the Fed would raise interest rates three times during 2016. But now the number of officials that expect the Fed to raise rates only once this year has gone up significantly due to the slowing down of the North American economy.
But the U.S. isn’t the only country with low interest rates. The Bank of Japan also held its benchmark interest rate unchanged, following the lead of the Federal Reserve. The Japanese central bank chose inaction despite a surging Yen. It decided to delay a move until after it determines how the results of a British referendum next week could impact the markets. Japan’s decision to maintain interest rates comes as more skepticism builds on the effectiveness of the monetary policy in the country. Fiscal policy is also under scrutiny right now as many are critical of the Prime Minister’s signature economy boosting program, sometimes known as Abenomics. Critics say that in the three year since it has launched the program the country has seen mainly contractions and only modest expansions at best.
It’s clear that the Brexit referendum is playing a large part in policy making for countries all around the world. There are a lot of issues driving the debate in Britain right now. For example, immigration is playing a big role. Many advocates who want Britain to leave the European Union argue that currently Britain does not have much control over who can enter its borders because other EU citizens get an automatic right to live in the U.K. In terms of international trade, the EU membership is holding Britain back with cross border trading. For example, many fisheries in the U.K. are struggling because of EU fishing restrictions. But if the U.K. left the European Union then Britain would be able to fish in its own waters in accordance to its own rules. Not only that but the U.K. would be also be allowed to make free-trade agreements more easily with India and China, which it doesn’t have yet. Many people in Britain feel that too many of Britain’s laws are made from Brussels and rulings are upheld by the European Court of Justice. They believe that by exiting the European Union, Britain will have more sovereignty and autonomy to make its own economic decisions. The vote will be next week so we will have to wait and see how the results of the referendum plays out.