How will a Dovish Janet Yellen Affect Gold?

Photo of Janet Yellen from the Federal Reserve Bank of San Francisco.

On January 29, Chairman of the Fed announced that the Federal Reserve would continue with their tapering plan and cut QE by a further $10 billion to $65 billion in bond purchases. The move unsettled markets and specifically brought attention to whether the growth that emerging markets had been enjoying in the past year or more had any real or sustainable foundation.

Less than a week later, on Monday, February 3, the Bernanke Era at the Fed ended as, after eight years as Chairman of the Federal Reserve, Ben Bernanke stepped down from office to be replaced by Federal Reserve Vice Chair, Janet Yellen.

So begins a new era in the Federal Reserve and the question on everyone’s mind now is how will Janet Yellen’s fiscal policy and actions compare with Bernanke’s and, specifically, how will she favor – or not favor as it were – the continued QE tapering that’s expected in 2014.

Make no mistake about it, on Wall Street Janet Yellen is firmly placed in the dove camp and, indeed, many of the decisions she’s made as a member of the Fed in the past point to the same. Case in point, in a February 2013 speech, Yellen commented on her concern over long-term U.S. unemployment, saying that it is “… devastating to workers and their families.” And a month later, when speaking about the stubbornly high U.S. unemployment rate, Yellen remarked to the National Association for Business Economics that, “I believe it’s appropriate for progress in the labor market to take center stage in the conduct of monetary policy.” To add further fuel to the argument supporting an incoming dovish Yellen, in President Obama’s remarks given in his October nomination of Yellen as new Fed chairman, President Obama stated “[Janet Yellen] is committed to increasing employment, and she understands the human costs when Americans can’t find a job.”

However, on the other side of the coin, there have been instances in Yellen’s career that point arguably to a more hawkish fiscal point of view. Take, for example, how in a Fed meeting in 1996, Yellen warned Greenspan of a threat of inflation. And indeed, some believe that if the U.S. recovery continues with its current upward momentum, and if unemployment rate sees a significant dip, Yellen may turn from a dove to a true fiscal hawk.

But, until that time, the wager that Yellen proves to be fiscally more concerned with unemployment than inflation and, at the same time, the wager that Yellen continues with the Fed’s rollback of its stimulus program are both good ones. With this in mind, the question of whether or not Yellen continues with Bernanke’s QE tapering can be answered with an affirmative. And the real question then is how this will be done and whether a true and final Fed QE exit strategy can be executed while maintaining market stability.

In 2013, Bernanke’s announcement of the Fed’s intention to taper its stimulus program inspired a brief semi-panic in the markets. And as evidenced by the market’s quick frothing in response to Bernanke’s January 29 announcement of the $10b in QE tapering, executing a continued exit strategy for the Fed’s asset purchase program, especially when done under the authority of a new chairman who has yet to prove herself and who has yet to establish any sort of rapport with Wall Street, may prove very difficult indeed. Future announcements of continued Fed QE tapering may lead to much more dramatic market fluctuations and, in a situation such as this, investors may return to seeing gold as a safe haven investment.

However, as mentioned before, there are two big unknowns when making any sort of Fed and market predictions right now – one, the unknown of how dovish Janet Yellen will truly end up being and, two, the unknown of how robust of a recovery the U.S. will see in its labor market this year, both factors which play hand-in-hand. Without a firm and sustainable drop in the country’s unemployment rate, Yellen’s dovish outlook may lead to a delaying of further Fed QE tapering, and, in turn, the economic acceleration we’ve seen in the past year may continue with little disturbance from the Fed. In an environment such as this, and if emerging markets successfully re-stabilize, investors may take on a more bullish attitude.

Mike Luft

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