Yellen Nomination Seen As Friendly For Gold But Eventual Tapering Still Expected
NEW YORK (Oct 9) Dr. Janet Yellen’s nomination as the next chief of the Federal Reserve is constructive for gold in the intermediate term since it does not signal a hasty rush out of quantitative easing, most analysts say.
Still, others say the metal’s price could eventually fall back anyway since even the doves on the Federal Open Market Committee are expected to eventually favor a tapering of QE as economic conditions improve.
The White House said President Obama will nominate Yellen as the next leader of the Federal Reserve, succeeding Ben Bernanke, whose term expires on Jan. 31. Obama is scheduled to make the formal announcement at 3 p.m. EDT.
Yellen, who would be the first woman to lead the Fed, has been the vice chair since 2010. Her nomination was widely expected after the other leading candidate, Lawrence Summers, withdrew from consideration amid mounting opposition from key Democrats in the Senate.
“This wasn’t a surprise at all. It was just a matter of when,” said Sean Lusk, director of commercial hedging with Walsh Trading.
Yellen is seen as one of the Fed members in favor of the central bank’s current program in which it buys Treasury and mortgage-backed securities in an effort to push down long-term interest rates, known as quantitative easing.
Accommodative monetary policy supports gold several ways, since low interest rates means more potential for inflation, tend to pressure the U.S. dollar and lower gold’s so-called “opportunity cost,” which is the lost income from not holding interest-rate-bearing assets instead.
“Longer term, I think her (nomination) is more bullish than bearish,” Lusk said.
He also said: “She’s been dovish just like Bernanke has. Her speeches and commentary over the last couple of years, since the financial crisis, has been in line with the current Fed chairman. That has been bearish dollar, bullish metals, at least in my view.”
Sterling Smith, futures specialist with Citi Institutional Client Group, offered a similar perspective.
“The question is what is going to happen with the quantitative-easing program,” Smith said. “I think Ms. Yellen is probably more bullish for gold than maybe some other choices that were available. She’s probably not going to be as big of a risk as some people might be about cutting the quantitative easing.”
Still, a Yellen-led Fed may not end up altering the price of gold beyond what many analysts already expect, suggested Carlos Sanchez, director of asset management with CPM Group. That means potential weakness whenever the Fed does trim back its bond purchases.
“I don’t think it (the nomination) may mean that much for the gold market,” he said. “She’s worked with Ben Bernanke and has been a part of the plan of purchases and quantitative easing. And I think she’s going to stick with the game plan, which is … as long as the economy is improving, they are going to taper the asset purchases. That should weigh on gold, whether that occurs later this year or early in 2014.”
Yellen Described As 'Dovish' But 'Nuanced'
Economists and financial-market analysts described Yellen as dovish yet an “independent” thinker willing to start scaling back quantitative easing as economic conditions improve.
“People look at Ms. Yellen as a dove. That’s probably true. But right now, everybody was going to be a dove,” said Jeffrey Rosen, chief economist at Briefing.com. “Inflation is trending well below target levels and you have unemployment still elevated. And you have no sign of an accelerating economic recovery. So I don’t see how the Fed under any (chairperson) could change the current path.
“What you may find with Yellen…is she may keep rates lower and quantitative easing going on slightly longer than a more hawkish (chairperson). But even then, we’re not talking about major changes. We’re just talking about things on the margins. To me, we’re going to see more of the same easy, accommodative monetary policy. Fed funds will probably not move until 2015, if not later, and tapering probably won’t start until 2014.”
Still, some observers cautioned about assuming Yellen will be overly dovish. Brown Brothers Harriman, in a research note, suggested some Republicans may claim she has too much vested interest in quantitative easing and that her stint would in essence act as a third term for Bernanke’s policies.
“We suspect that Yellen's stance is more nuanced and, in different economic conditions, her views will change,” BBH said. “Reviewing her public record, the characteristics that seem clear are independent thinking and being a gradualist.”
CIBC World Markets said Yellen would not necessarily usher in a new era of more dovish policy.
“Yellen’s FOMC voting record has matched Bernanke’s and her speeches have largely echoed the themes of her predecessor,” CIBC said. “Bonds may see a temporary boost on the appointment of Yellen to the helm…given her support of the Fed’s overall dovish stance. However, assuming an amicable passing of the current debt ceiling and budgetary deadlock, we see longer-term risks of a sell-off as the drag from fiscal policy eases in 2014, giving even a Yellen-led Fed justification to scale back bond-buying by early next year.”
Dennis Gartman, investor and publisher of The Gartman Letter, described Yellen as “being a bit too dovish for our economic tastes” but also said “she shall prove to be a fine nominee and we’ve no problems with this decision.”
More significantly, he said in his daily report, the news offers the markets “some semblance of certainty” in an environment where markets “are grasping for what bits of certainty we can find and get.” The U.S. government is partially shut down in a stalemate in Washington D.C. over a continuing resolution on the budget, with another battle over the debt ceiling shaping up.
“Dr. Yellen brings a sense of continuity to the duties of the chairmanship; she has served as a governor of the Fed; she has served as a president of one of the regional Federal Reserve banks,” Gartman said. “She has been only recently vetted through the nomination process in the Senate in her current position as the Fed’s vice governor. She has the respect and the ear of the others on the FOMC. She will serve well and clearly the president could have done far, far worse than he has with her nomination.”
