Changes with the Federal Reserve

Updated on

We may be seeing some changes with the Federal Reserve. Two crucial events are underway over the next two weeks at the largest central bank in the world:

  1. They will be holding their regular meeting, held once every six weeks, to set interest rates and monetary policy between October 31st and November 1st.
  2. The new Federal Chair will be announced by President Trump, who will most likely replace the current chair, Janet Yellen.
  3. As we know gold price always moves following any Fed meeting.

Odds of an Increased Rate

The odds are very high that there will not be an increase in interest rates, according to the futures market. It looks like a 98.5% chance that the Fed will maintain the current target rate of 1.00%-1.25%, as evidenced in this chart:

Our proprietary Fed-watch analysis actually shows a different perspective on this topic. This analysis indicator uses 3-month US Treasury yields to determine whether interest rates will go up. These yields generally rise 1-2 months before each rate increase, as seen in green in the chart below.

You will see marked in blue that although yields have not made it back to the short-lived peak reached in July, they are once again on the rise:


If these yields reach or go above this peak of 1.15 by December, we do predict that interest rates will increase 0.25% at the meeting held that month.

Will Chairwoman Yellen Be Replaced?

The current chairwoman’s term will expire in February of next year. Recent reports have hinted that Trump may not renew Chairwoman Yellen’s term and will instead replace her. The most likely candidate at this time seems to be a current member of the Federal Reserve Board of Governors, Jerome Powell.

If Yellen is replaced, her tenure will be the shortest of any Fed chair since 1979, when President Carter replaced G. WIlliam Miller after only 18 months as chair.

One Federal Reserve analyst, Steven Beckner, summarized Miller’s shortened term this way:

“Under Arthur Burns, who chaired the Fed from 1970 to 1978, and under G. William Miller, who was chairman… to August 1979, the Fed provided the monetary fuel for an inflation that began as a flicker and grew into a fearsome blaze… If Nixon appointee Burns lit the fire, Miller poured gasoline on it during the administration of President Jimmy Carter. Without question the most partisan and least respected chairman in the Fed’s history, this former Textron executive worked in tandem with fellow Carter appointee, Treasury Secretary W. Michael Blumenthal, in pursuit of monetary policies that were expansionist domestically and devaluationist internationally. The goals were to spur employment and exports, with little thought to the dollar’s value. By early 1980, inflation was running at 14 percent per year.”

This leads to the question of what is happening inside the central bank to bring about this evident distrust of Yellen? If Miller was responsible for the highest inflation rate in the history of the United States, what has Yellen done to deserve the shortest term since him? Experiencing this non-renewal after only one term is tantamount to being fired for the chairmen and women of the Fed.

The Executive Branch and Federal Reserve seem to have an issue in their relationship for now. Our suspicion is that recent reports of a long-term top in place on the US dollar is partly related to this instability, which may grow further if a Yellen term non-renewal is announced.

In US history, two central banks have been dissolved- the success of a central bank is not guaranteed.

Article by Christopher Aaron, Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq.

Technical analysis shares many similarities with mapping: both are based on the observations of repeating and embedded patterns in human nature.

His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.

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