What Triggered Silver’s Hiccup Last Week?
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Fed officials flexed their muscles during the last FOMC meeting. Silver tripped and fell in response, but that didn’t last long – why?
The hawkish force was strong with this FOMC. The minutes from the last meeting of the Committee in December offered almost no dovish signals. In particular, the document doesn’t mention anything about the Fed’s pivot. Actually, we can read that “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023”. That’s bad news for precious metals, such as silver and gold.
What’s more, the minutes revealed the FOMC participants’ worries about the dovish hopes of investors. The Fed decided to emphasize that it’s not going to change its monetary policy and cut interest rates anytime soon, so investors shouldn’t bet on such a scenario. As the key paragraph says,
«A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path. Participants noted that because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.»
The message is clear. To paraphrase slightly the poet’s words, “abandon all dovish hope, you who trade here.” A more hawkish Fed than anticipated is fundamentally negative for silver.
Silver Lining in Minutes?
Although minutes were considered to be hawkish, they also included some dovish parts. In particular, the Committee’s members noted the risk of overtightening:
«The lagged cumulative effect of policy tightening could end up being more restrictive than is necessary to bring down inflation to 2 percent and lead to an unnecessary reduction in economic activity, potentially placing the largest burdens on the most vulnerable groups of the population.»
And “a couple of participants” declared that risks to the inflation outlook became more balanced. It means that the Fed is approaching the peak level of the federal funds rate and the end of the tightening cycle.
Last but not least, “most participants emphasized the need to retain flexibility and optionality when moving policy to a more restrictive stance”, which could mean that the U.S. central bankers are preparing to scale back to 25-basis point hikes in the near future. All these dovish signals could provide a silver lining for silver bulls.
Implications for Silver
What does it all mean for the silver outlook for 2023? Well, the hawkish FOMC minutes maybe weren’t a catastrophe for silver prices, but they pushed the metal significantly down, from about $24.3 to $23.4, as the chart below shows. After all, the minutes translated into expectations of a steeper path of the federal funds rate.
Silver Prices in 2022-2023
However, I still believe that the Fed will blink at some point. Right now, they simply try to manage the market expectations, so they flex their muscles. But when recession arrives, they will chicken out and make a pivot. It should be a bullish event for silver, and even without a U-turn, precious metals can go up – after all, even without the pivot, the U.S. monetary policy will be much less hawkish this year than in 2022.
Now the question remains — when will the recession arrive?
