Two important events are unfolding at the largest central bank in the world within the next two weeks:

  1. The Fed gathers to set interest rate and monetary policy. This is at its once-per-six weeks meeting: on October 31 – November 1.
  2. President Trump is due to announce his candidate for the new Fed chair. Thus by default likely ousting current chairwoman Janet Yellen.

Rate Hike Odds

On the interest rate front, the futures market is pricing in overwhelming odds that there will be no hike at the coming meeting. The odds are 98.5% that the Fed maintains the current target rate. Which is at 1.00% – 1.25%, as seen in the probability chart at right:  

Chart federal reserve

Interestingly, our proprietary Fed-watch indicator is offering a slightly different perspective. It relies on 3-month US Treasury yields as a leading signal for Fed interest rate hikes. [For context: 3-month yields have generally been rising 1-2 months before each Fed rate hike. You can see this by the green highlights below.]

Note how although returns are still not back to their short-term July peak. However, they are indeed steadily rising again (blue callout):

Gold chart federal reserve

If yields meet or exceed their July peak at 1.15 before December, we predict the Fed will indeed hike by another 0.25% at the December meeting.

The critical point on the above chart is to recall that each Fed rate hike since 2015 (itself the first in a decade) has witnessed a sequentially higher associated gold price. (black arrows, above). Thus, the expectation of another rate hike to come deserves our continued monitoring.

Yellen Out?

Chairwoman Yellen’s term is set to expire in February. Reports over the last week from unnamed Fed officials have hinted that Trump may choose not to renew Yellen’s term. The leading replacement candidate is Jerome Powell. He is currently a member of the Federal Reserve Board of Governors.

Powell federal reserve

Powell to replace Yellen — Federal Reserve?

If Trump indeed chooses not to renew Yellen’s position, it will mark the shortest tenure of a Fed chair since G. William Miller. President Carter ousted Miller in 1979 after less than 18 months in office.  

Steven Beckner, a Federal Reserve analyst, offers this summary on Miller’s short time in service at the Fed:

“Under Arthur Burns, who chaired the Fed from 1970 to 1978, and under G. William Miller, who was chairman… to August 1979, the Fed provided the monetary fuel for inflation that began as a flicker and grew into a fearsome blaze. If Nixon appointee Burns lit the fire, Miller poured gasoline on it during the administration of President Jimmy Carter. Without question, the most partisan and least respected chairman in the Fed’s history, this former Textron executive worked in tandem with fellow Carter appointee, Treasury Secretary W. Michael Blumenthal, in pursuit of monetary policies that were expansionist domestically and devaluationist internationally. The goals were to spur employment and exports, with little thought to the dollar’s value. By early 1980, inflation was running at 14 percent per year.”

May we then ask

Why do reports suggest that Yellen will have the shortest term since Miller? Yet Miller was responsible for the highest inflation rate in US history? What is occurring inside the central bank to cause Trump’s apparent distrust of Yellen?

A non-renewal after just one term in office is as close to firing a Fed chair as possible without the political embarrassment associated.

Something is not right within the US executive branch / Federal Reserve relationship. We suspect that recent analysis shows a long-term top being put into place in the US dollar. This is partly related to this instability within the central bank. It may express within the next two weeks in a Yellen departure announcement.

Two central banks previously dissolve into the history of the United States. Stay tuned – the lasting success of this institution is not in stone.

 


Christopher Aaron,
Bullion Exchanges Market Analyst

Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. This is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq.

Technical analysis shares many similarities with mapping. They  both base on the observations of repeating and embedded patterns in human nature.

His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is third-party analysis. It does not necessarily match views of Bullion Exchanges. Readers should not consider it as financial advice in any way.

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