Gold had a strong sell off last week after the FOMC minutes came out. The market interpreted some parts of it as a hawkish signal that Quantitative Easing might be coming to an end this year. Gold (GLD) prices went down as much as 3% on heavy volume before starting to attract some buying interest.
I believe the reaction was overdone and the minutes present nothing new. First let's review what was the content that had so many people nervous:
"In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted."
Gold investors got nervous because they realized that the biggest bullish point that drove the gold rally (quantitative easing) was now potentially coming to an end.
I believe this presents no significant hawkish signal for a number of reasons:
First, there is a misunderstanding in the media about the minutes and who it refers to when they use terms like "several," "most" or "many," some people seem to think that it refers to the voting members and the "several" reference represents some kind of major split in the Committee, that is not accurate, the minutes refer to the entire lineup of the FOMC whether they are voting members or not.
"Non-voting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee's assessment of the economy and policy options."
Source: About the FOMC
If the Fed was excluding or including a certain group when they were referring to people using terms like "several," "a few" or "most" they would say so since this would be information of major significance to market participants, they reason that they don't is because they are talking about the entire cast of members present in the meeting, whether they are voting or not.
It would be strange for the Fed to marginalize non-voting members by excluding their thoughts and views from the FOMC minutes and not mention such exclusion in the document. The Fed is an institution that takes every word they said very carefully, it would be totally bizarre for them to say things like "several" "most" "many" to a group of people that is actually a subgroup (voting members) and not mention that fact.
This is significant because the entire FOMC is composed by 19 members so "several" is not that much. According to Bill Gross "several" means 4-5 people and most of those are likely to be Fed presidents. Why? Presidents are usually more hawkish because the are not chosen by the President of the US but rather by Regional Fed Banks. This removes part of the dovish bias in the selection process. As a result they tend to be quite active in speaking out against easy money policies (the leading voices against easy money such as Fisher, Lacker, Plosser, Bullard are all Fed Presidents).
They also have less influence in the FOMC because they have less votes than Governors (right now there are 7 Governors voting, against only 4 Presidents). Presidents have a rotation where they vote every 3 years for 1 year whereas Governors vote every year no matter what.
Secondly, the minutes rank of quantitative counting measures have three higher ranks, "many," "most" and "all" so there is a long way to go before there is some kind of consensus on this.
Thirdly, take a look at this section of the FOMC minutes:
"Several thought it important to begin a program of asset sales in the near future to ensure that the Federal Reserve's balance sheet shrinks more quickly and in a more predictable manner than could be achieved solely by redeeming maturing securities and not reinvesting prepayments; they judged that a program of asset sales spread over a number of years would underscore the Committee's determination to exit from the period of exceptionally accommodative monetary policy in a manner and at a pace that would keep inflation contained without having large effects on asset prices or market interest rates."
There is a catch though, these weren't the minutes that were put out last week, these were from early 2010.
This was just a little hawkish revolt against the new easy money policies. The hawks just can't help themselves, did their efforts turn into anything meaningful? No, it was just a bunch of empty words and "open mouth operations." Matter of fact Fed President Kocherlakota spent a good part of 2010 talking about how the Fed could raise rates by 2010 end, yet it never happened.
Easy monetary policy is alive and well. The last FOMC minutes were misinterpreted by both market participants and the media given that the Fed doesn't break down who exactly are part of the "several" group. In all likelihood this group is composed by Fed presidents who are usually non-voting and tend to be hawkish given that their selection process is less politicized but they control very little of the agenda and policy direction since they are outnumbered by Governors. The Fed is really run by Bernanke, Yellen and Dudley who so far have given no indication that 2013 is some kind of end of the road for Quantitative Easing. As a result I don't expect QE to be halted this year and this should support higher gold prices, all other things being equal.