More good news of the emerging belief that the global economy is stabilising.

The US Fed’s post-meeting statement started as follows: “Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up.”

However, US households’ spending is sluggish and businesses are cautious.

“With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the committee expects that inflation will remain subdued for some time.”

Interest rates will remain close to zero, indeed “low rates of resource utilisation, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.

“In order to promote a smooth transition in markets, the committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.”

The Fed’s decision more or less coincided with news that the US economy is still shedding jobs, with a net 203,000 jobs lost in October.

No surprises here, folks.

What is perhaps more interesting though is the direction of the gold price. Overnight gold hit another record high — settling at a close of  $US1087.30 ($A1207.28) an ounce after hitting an intra-day high just shy of $1100.

Gold is traditionally seen as the ultimate hedge against inflation — witness the gold price soaring from $30 an ounce to more than  $800 in a matter of years in the late 1970s. The more worries there are about inflation in the US economy, the higher gold will go.

Watching the gold price therefore provides a keen insight into how the markets view the Fed’s policy. If the gold price starts to really rocket — some have suggested it could rise to $2000 an ounce next year, it is a clear indication that markets believe the Fed is not serious about fighting an inflationary outbreak in the US. This would in turn create tough decisions for policy makers around the world — including our own Reserve Bank and federal government.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey