The Federal Reserve is likely to raise the Federal Funds Rate by no more than 75 basis points at this week’s Federal Open Market Committee (FOMC) meeting, despite the markets having priced in a higher chance of a 100 basis point increase following last week’s Consumer Price Index (CPI) report, according to Adrian Day, President of Adrian Day Asset Management and Portfolio Manager of the Euro Pacific Gold Fund.
A 100-basis point hike today would not only be unlikely, but also disastrous for the markets, Day told David Lin, Anchor 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 normally is pretty good telegraphing.”
Day added that there is no chance of a less than 75 basis-point hike.
“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 hike larger than consensus expectations would “collapse” gold prices and stocks.
“I think 75 is baked in, so if you get 75, gold is unlikely to go down and stocks are unlikely to go down more, and I mean go down more on that news. 100 would be different. If they have 100 [basis-point hike] I think gold collapses again,” he said.
Day’s comments come as the August headline CPI declined slightly an an annual percent change basis to 8.3%. Core CPI, which excludes food and energy, climbed to 6.3%, up from July’s 5.9%.
Immediately following the release of the CPI print last week, the FedWatch Tool, which tracks the probabilities of rate hikes by size, saw an increase in the chances of a 100 basis-point hike to more than 30%. As of 10:30 am ET on Wednesday, the breakdown stands at 82% for 75 basis points and only 18% for 100 basis points.
The gold price is unchanged Wednesday morning ahead of the FOMC decision later in the afternoon.
Stocks are up slightly, with the S&P 500 up 0.5% as of 10:30 am ET.
U.S. unemployment ticked up by 0.2% last month to 3.7%. Although a small increase occurred over the summer, it is still at historical lows.
Day said that the unemployment rate has in the past been low right at the onset of a recession before increasing, and therefore a low unemployment rate is not itself an indicator for a healthy economy.
“If you just take a snapshot and look at the unemployment rate, yes, it’s very strong, as [Treasury Secretary] Janet Yellen and [Fed Chair] Jerome Powell would say. I would say a couple of things. Number one, the labor participation rate, until the last report, has been very, very low. The labor force participation rate has been declining and is low, and all other things equal, that makes your unemployment rate low as well,” he said. “If you look at every recession going back to the 1960s, the unemployment rate was at a low immediately before at the cusp of a recession. Having a low unemployment rate does not mean we’re not going to have a low recession.”
On consumer sentiment, Day cited a decline in optimism as the University of Michigan Consumer Sentiment Index is continuing its summer-long decline. It is now at below 2008 lows, and is at the lowest level since data was reported in the 1970s.
While retail sales increased by 0.3% last month, Day said that this actually signals a decline in consumers’ purchasing volume.
“When retail sales are static and up only a little bit, when prices are up 10%, that means that the volume, people’s volume, is going down,” he said.
Day said that the Federal Reserve will continue to raise rates into this economic slowdown, but will stop and pivot right before they cause a “serious recession.”
For more information on Day’s long-term gold price outlook and his expectations for inflation, watch the video above.
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