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Gold Higher, Dow Jones Gyrates, Treasury Yields Sink on FOMC Announcement

Gold Higher, Dow Jones Gyrates, Treasury Yields Sink on FOMC Announcement

Thomas Westwater, Analyst

FOMC, COVID-19, Recession, Dow Jones, Gold, Treasury Rates – Talking Points

  • COVID-19 remains prime factor to economic recovery
  • The Benchmark Federal Funds Rate unchanged at 0%-0.25%
  • Dot plot shows rates likely to remain low until 2022

The Federal Open Market Committee of the Federal Reserve left interest rates unchanged Wednesday afternoon, in line with expectations. This latest action leaves the benchmark Federal Funds rate at its historic low of 0%-0.25%. Gold marched higher following the announcement. Granted that, the Dow Jones Index and S&P 500 Index failed to follow through on strength and quickly erased gains as Powell took the podium following the rate decision release. However, tech stocks continued to show strength and added to recent record-breaking gains in the index.

Dow Jones Index (1-Min Chart)

Gold Higher, Dow Jones Gyrates, Treasury Yields Sink on FOMC Announcement

Source: IG Charts

Wednesday's hold on rates follows unprecedented action from the Federal Reserve over the past few months amid the COVID-19 pandemic, as the Fed pulled rates down from the 1.75% to the current 0.25% upper limit to support the economy. Treasury yields dropped after a brief tick up on the FOMC news, and now continue to head lower following the conclusion of Chair Powell's remarks. The 10-Year note's yield fell to 0.75%, clawing back all gains from the past week.

Turning to the Fed's updated economic projections, reveals GDP expectations from the Fed for the current year at -6.5% which is slightly more optimistic compared to recent figures from the OECD, showing a -7.3% to -8.5% drop in U.S. GDP. Nevertheless, projections for 2021 show the Fed expects a rebound in GDP with a positive 5.0% figure. This follows The National Bureau of Economic Research announcing Monday that the U.S. officially entered a recession in February, putting an end to the record economic expansion that followed the 2008 financial crisis.

Fed Updated Dot Plot

FED Dot plot

Source: Federal Reserve

During the press conference Chair Powell noted the challenges presented by the COVID-19 pandemic and stated that policy decisions will remain flexible in response to the ever changing situation. Rates remaining depressed through 2022 was highlighted when asked about the outlook on monetary policy, as Chair Powell referenced the dot plot and again hit on the unknown trajectory of the economy amid the virus pandemic.

10-Year Treasury Note Yield (5-Min Chart)

treasury rate fomc

Chart created in TradingView

While further policy tools, such as yield curve control (the Fed buying certain maturity Treasuries to keep targeted rates suppressed) were not discussed in the policy statement, many market participants expect the Fed to move this into their toolbox in the coming months. Willingness from the Fed to keep the taps open on its current tools, such as the balance sheet and current funding facilities bolstered gold, as the US Dollar weakened versus its major G10 peers.

Spot Gold (5-Min Chart)

SPOT GOLD

Source: IG Charts

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