by Adam Hamilton
Gold surged sharply this week after the Yellen Fed yet again chickened out on raising its benchmark interest rate. Gold-futures speculators’ irrational fear of Fed rate hikes has been a major drag on gold. And rate-hike risks just plummeted in the coming months, since the Fed can’t risk acting heading into this year’s critical US presidential election. So gold’s next major upleg was likely just unleashed by the Fed.
Oddly, Wall Street’s expectations for a rate hike at this week’s latest meeting of the US Federal Reserve’s Federal Open Market Committee were surprisingly high. The interest-rate target directly controlled by the FOMC is the federal-funds rate. Commercial banks are required to hold reserves at the Fed. They lend these reserves to other banks overnight in the federal-funds market, at the FOMC’s federal-funds rate.
This market is so important that federal-funds futures contracts trade on the CME. No one has more knowledge about federal funds than the hedgers and speculators trading in this market. Parsing their collective bets yields the implied odds of Fed rate hikes, which the CME conveniently calculates and summarizes in real-time with its FedWatch Tool. It revealed this week’s rate-hike expectations were totally wrong.