Yesterday, the Federal Reserve made an important decision—it will keep short-term rates at 0.25% until the unemployment rate hits 6.5% or falls below that. Also, the rate of inflation will govern short-term rates; until inflation touches or goes over 2.5%, rates will remain at 0.25%.
That means the Fed will also continue buying $45 billion in long-term government bonds each month, but by the end of the year, it will no longer sell similar amounts in short-term Treasury notes.
This hurts the dollar, of course, but it also meant gold shot up. Futures for February rose 0.5 percent to stabilize at $1,717.90/oz on the New York COMEX, but it went as high as $1,725 directly after the Fed’s announcement. Compare that to pre-announcement levels of $1,712.40.
The surprising thing about the Fed’s announcement wasn’t the fact that stimulus action is going to continue; it’s that the Fed tied unemployment and inflation together. Analysts were quick to indicate that all this means the dollar will remain weak well into 2013, while gold will remain strong and possibly gain in the same period.
The continuing Fed policy of quantitative easing “will further weaken the U.S. dollar and support gold well into 2013, with volatile trading patterns along with profit-taking periods as well,” said Jeffrey Wright, managing director at Global Hunter Securities.
At the same time, the Fed predicted that the unemployment numbers would stay between 6.8% and 7.3% through 2014, USA Today reports.
Key interest rates, based on this projection, are expected to remain stable at their present level right until mid-2015.