FOMC Sees Two Rate Hikes in 2023. Gold Didn’t Like It
Sunshine Profits | Jun 18, 2021 02:05PM ET
The newest Fed statement and dot plot indicated a much more hawkish tone among the FOMC members than the markets expected, and gold dropped.
On Wednesday, June 16, the hawkish , as the Fed noticed an improvement in the epidemiological situation, as well as higher inflation. Bad news for gold.
However, the statement was only slightly changed, so the investors focused more on the accompanying GDP growth and higher inflation this year, as the table below shows.
As one can see, the FOMC expects that the GDP will soar 7% in 2021, compared to a 6.5% rise expected in March. It also assume that the pace of economic growth will be slightly higher in 2023. Meanwhile,Fed officials believe now that the PCE inflation (core PCE) will jump to 3.4% (3%) this year, compared to 2.4% (2.2%) seen in March. They also forecast a slightly lower unemployment rate in 2022.
But the most impactful change occurred in the expected path of the federal funds rate . The FOMC members now forecast that the U.S. policy rate will be 0.6% at the end of 2023, an important upward change from 0.1% projected in March. In other words, the U.S. central bankers believe that two interest rate hikes will be appropriate in 2023. It means that they started to think about tapering, which is fundamentally negative for gold prices.
Indeed, Powell said during his post-meeting press conference that we can “think of this meeting that we had as the talking about talking about meeting [at which the Fed will start tapering], if you like.”
h2 Implications For Gold/h2What does the recent FOMC meeting imply for the gold market? Well, the Fed struck again. As a result, the price of gold plunged. As the chart below shows, the London P.M. Fix slid from about $1,865 on Tuesday to $1,779 on Thursday.
The reason is simple: the fresh dot plot shows that a majority of the Fed officials currently forecasts two quarter-point rate hikes in 2023. Thirteen of 18 FOMC members see some interest rate increases in 2023 compared to just seven members in March. Moreover, seven participants now predict some upward moves next year. These changes lifted market expectations of future bullion . Furthermore, the more hawkish stance of the Fed strengthened the U.S. dollar, creating downward pressure on gold prices. In other words, the new economic outlook revealed some hawks among the FOMC members and that there might be less tolerance toward higher inflation than previously thought.
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However, the bullish case for gold is not over yet. After all, the Fed maintained its very accommodative monetary policy, and it will not hike interest rates this year and probably not also in 2022. Additionally, the dot plot is not the official projection of the future path of the federal funds rate, so it should be taken with a grain of salt. A lot may happen by 2023. Also, the Fed leadership seems to be more dovish than many of the regional Fed presidents.
Last of all, Powell repeated that inflation is merely transitory. But why hike interest rates if inflation is merely transitory and real interest rates should stay negative.
Having said that, the hawkish Fed’s statement and hawkish economic projections are fundamentally negative for the yellow metal in the medium term. The chances of a replay of 2013 have increased. It seems that gold may struggle without an inflationary turmoil, debt crisis .
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