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Fed Expected To Keep Signaling Low Rates This Week But Not Undertake QE3

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(Kitco News) - Federal Reserve policy-makers are expected to continuing signaling low interest rates for some time to come, but are not expected to announce any plans for a third round of quantitative easing when they meet this week.

If so, the outcome of the Tuesday-Wednesday meeting of the Federal Open Market Committee likely won't mean any dramatic immediate impact on gold since these expectations are already factored into prices, analysts said. Still, the prospects for a continuation of low rates are nevertheless friendly for precious metals.

The release of a post-meeting statement from the FOMC is scheduled for Wednesday at 12:30 p.m. EDT. Federal Reserve Chairman Ben Bernanke is slated to conduct an ensuing press conference at 2:15 p.m. EDT.

"I expect the Fed to maintain the low interest-rate environment, with no hint of any change to policy either," said Frank Lesh, broker and futures analyst with FuturePath Trading.

The target for the federal-funds rate, at which banks lend to each other overnight, has been between zero and 0.25% since December 2008.

"It will remain as it has, cemented at or near zero, for the economic data of the past several weeks has been tilted toward weakness rather than toward strength," said newsletter writer Dennis Gartman in Monday's The Gartman Report. "The unemployment rate has been tipping upward, rather than tipping down; the PMIs (purchasing managers indexes) have been turning for the worse rather than for the better."

Further, equities have been weakening and bond prices have been strengthening, he pointed out.

Several observers said the Fed is likely to make reference to a soft patch in the economy, and Deutsche Bank even suggested this could mean a downgrade of the FOMC's economic assessment.

"From the March 15 meeting to the April 26-27 meeting, the description of the economic recovery was downgraded from being 'on firmer footing' to 'proceeding at a moderate pace.'" Deutsche Bank said in a Monday research note. "Recently, Chairman Bernanke described the recovery as being 'uneven' and 'frustratingly slow,' and he noted that growth appears to be somewhat slower than expected. Hence, one of the more obvious modifications to the Fed's economic assessment will likely be a more subdued growth profile.

"It will be important to note the degree to which the Committee attributes the recent soft patch to transitory factors, such as gasoline prices and Japanese supplier disruptions, as opposed to a more sustained slowdown."

QE3 Not Expected Even As QE2 Winding Down

Policy-makers are likely to suggest they will keep reinvesting the proceeds from Treasury purchases in QE2, Lesh said.

However, he and others said, the Fed likely will not embark upon a third round of quantitative easing as the second round winds down with the end of the first half of the year.

The subject will be a key focus for markets and likely will be brought up by reporters during Bernanke's second-ever post-FOMC press conference, analysts said. Quantitative easing refers to Fed buying of U.S. Treasury securities in a bid to push down long-term interest rates and further stimulate the economy when short-term rates are effectively zero.

Brown Brothers Harriman and Barclays Capital said in research notes that they look for policy-makers to characterize recently soft U.S. data as temporary. Further, Barclays cites a trend upward for core inflation.

"The press conference is…likely to be watched to for comments in regards to QE3," BBH said. "We continue to think the bar is set very high on this front and expect him to repeat that the balance of risk is not in favor of further asset purchases."

But conversely, the Fed won't necessarily rule out QE3 either, some observers said.

"I think we will hear from the Fed regarding QE3 that it is not necessary at this time," said Sterling Smith, commodity trading advisor and analyst with Country Hedging. "However, he (Bernanke) will be monitoring the situation very closely. The door will be left open…"

The continuation of low rates itself implies continued underlying support for gold, particularly since this would remain a bearish influence for the dollar, observers said. But this also would not be a surprise and is already discounted.

"Overall, I expect it (the anticipated meeting outcome) to be neutral for gold," Smith said. "There probably will be no big move, as long as we don't get a surprise.

"A surprise would be if he were to come right out and say we're going to buy X amount of billions of dollars of these (Treasury) securities. If we were to see an announcement of QE3, that would be quite bullish and would push gold higher. But at this time, I don't see any language coming from the Fed of that nature."

By Allen Sykora of Kitco News; asykora@kitco.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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