Traders interpreted November FOMC minutes as dovish, pushing silver prices up.
On November 23, 2022, the FOMC published minutes from its last meeting at the beginning of November .
They show the ongoing debate among the FOMC participants about the appropriate stance on monetary policy . Some of them noted that inflation had been higher and more persistent than expected (according to the staff’s projection, inflation will reach the Fed’s target only in 2025). And with only very few signs that inflation pressure was abating, they would like to hike the federal funds rate to a higher level than previously anticipated, especially given that the labor market remains very tight. These parts of the minutes were quite hawkish and, thus, negative for the silver price outlook.
Dovish Signals in the Minutes
However, the minutes also contained dovish signals. First of all, the FOMC members seemed to be satisfied with the front-loading of the rate increases and moved into fine-tuning consisting of smaller steps:
A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee's goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate. In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.
The slowdown in the pace of interest rate hikes is not surprising, given the upcoming recession. Actually, the Fed’s staff openly noted that the likelihood of recession is the same as of the baseline projection.
Implications for Silver
What does it all mean for the silver price outlook? Well, on the one hand, the pace of the Fed’s moves will be slower, while, on the other hand, the terminal level of the federal funds rate is to be higher. However, it’s not set in stone, and I won’t be surprised if the Fed doesn’t reach the level it now believes is adequately restrictive, given its concerns about the financial stability and a likely recession next year. The longer the tightening cycle will last, the higher the odds that deteriorating economic conditions will force its premature end.
Anyway, the price of silver jumped above $21.4 after the release of the minutes, which suggests that investors interpreted them as dovish, on balance. The upward move continued the next day, as the chart below shows.
The implication is as follows: although the interest rates could be a bit higher than thought earlier, the US central bank will reduce the pace of hikes. It means that the transition into a dovish Fed has just begun. We still have to wait for a full pivot, but it shouldn’t take too long, especially in light of an upcoming recession. From the fundamental perspective, this is good news for the silver price outlook.
Arkadiusz Sieron, PhD