How Would An Increase In Fed’s Inflation Rate Target Affect Gold?

…San Francisco Fed President John Williams suggests that the Fed is considering raising its inflation target (currently set at 2% annually)…[Such a] shift pushes the FOMC in a dovish direction and will reduce the market odds of interest rate hikes this year. It is positive news for the gold market.

The comments above and below are excerpts from an article by Arkadiusz Sieroń (SunshineProfits.com) which has been edited ([ ]) and abridged (…) to provide a faster and easier read.

…Williams…argues that central banks must be able to adapt policy to changing economic circumstances and to better cope with a low natural real rate of interest. A higher inflation target would imply a higher nominal interest rates and thereby give monetary policy more room to maneuver (it would allow larger cuts in rates in response to an economic downturn before the zero bound becomes binding)…[but the fact is that] the U.S. central bank cannot [even] hit 2%, so it could have problems with reaching a higher target.

Alternatively, the Fed could replace inflation targeting “by a flexible price-level or nominal GDP targeting framework, where the central bank targets a steadily growing level of prices or nominal GDP, rather than the rate of inflation”.  [Unfortunately, any] change of the target could reduce the credibility of the Fed…and it could also re-anchor inflation expectations as the public might expect soaring inflation after the shift…

What does Williams’ proposal imply for the gold market?

His suggestion should be positive for the yellow metal, as it clearly shows that central banks are helpless in the current environment of low inflation, low interest rates and sluggish economic growth – [that] the conventional monetary policy does not work…