The Federal Reserve is likely to raise the Fed Funds Rate by no more than 75 basis points at this week’s Federal Open Market Committee (FOMC) meeting, even though markets have priced in a higher probability of a rate hike. 100 basis points after last week’s Consumer Price. Index Report (CPI), according to Adrian Day, Chairman of Adrian Day Asset Management and Portfolio Manager of the Euro Pacific Gold Fund.
A 100 basis point rally today would not only be unlikely, but also disastrous for markets, Day told David Lin, presenter for Kitco News at the Precious Metals Summit in Beaver Creek.
“I don’t think they need to do 100 basis points,” Day said. “I think the market is expecting 75 and the Fed is usually pretty good at telegraphing.”
Day added that there is no possibility of an increase of less than 75 basis points.
“One thing we know for sure, if it’s not 75, it’s going to be 100. It’s not going to be 50,” he said.
Importantly, a rise greater than consensus expectations would “crash” gold prices and stocks.
“I think 75 is built in, so if you get 75, gold is unlikely to go down and stocks are unlikely to go further down, and I mean further down on that news. 100 would be different. if they have 100 [basis-point hike] I think gold is collapsing again,” he said.
Day’s comments come as August’s headline CPI declined slightly on an annual percentage change basis to 8.3%. The core CPI, which excludes food and energy, rose to 6.3%, from 5.9% in July.
On the heels of last week’s CPI print release, the FedWatch tool, which tracks the odds of rate increases by size, saw the chances of a 100 basis point increase rise to more than 30%. As of 10:30 am ET on Wednesday, the breakdown is 82% for 75 basis points and only 18% for 100 basis points.
The price of gold is unchanged on Wednesday morning ahead of the FOMC decision later in the afternoon.
Stocks are up slightly, with the S&P 500 up 0.5% at 10:30 a.m. Eastern. m. ET
US unemployment rose 0.2% last month to 3.7%. Although there was a small increase during the summer, it is still at record lows.
Day said the unemployment rate in the past has been low right at the start of a recession before rising, and therefore a low unemployment rate is not in itself an indicator of a healthy economy.
“If you just take a snapshot and look at the unemployment rate, yeah, it’s very strong, like [Treasury Secretary] Janet Yellen and [Fed Chair] Jerome Powell would say. He would say a couple of things. Number one, the labor force participation rate, until the last report, has been very, very low. The labor force participation rate has been declining and is low, and all else being equal, that makes their unemployment rate low as well,” he said. “If you look at all the recessions going back to the 1960s, the unemployment rate was at its lowest point immediately before the height of a recession. Having a low unemployment rate doesn’t mean we’re not going to have a low recession.”
As for consumer sentiment, Day cited a decline in optimism as the University of Michigan Consumer Sentiment Index continues its decline throughout the summer. It is now below the lows of 2008 and is at the lowest level since data was reported in the 1970s.
While retail sales rose 0.3% last month, Day said this actually indicates a decline in the volume of consumer purchases.
“When retail sales are static and up just a little bit, when prices are up 10%, that means volume, people’s volume, is going down,” he said.
Day said the Federal Reserve will continue to raise rates in this economic slowdown, but will stop and turn just before they trigger a “serious recession.”
For more information on Day’s long-term gold price outlook and his inflation expectations, watch the video above.
Follow David Lin on Twitter: @davidlin_tv
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