Gold Holds Its Ground Despite Exceptionally Hawkish FOMC

Last week, the Fed provided the steepest rate hike in three decades. Although it was an extremely hawkish move, gold prices increased!

It was the historic by 75 basis points last week to 1.5-1.75%:

The committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run. In support of these goals, the committee decided to raise the target range for the federal funds rate to 1‑1/2 to 1-3/4% and anticipates that ongoing increases in the target range will be appropriate.

The hike followed a interest rates by 50 basis points.

Besides the steeper move, the June monetary policy statement was barely changed compared with May. Interestingly, the Fed removed the sentence “with appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2% objective and the labor market to remain strong,” but added this one: “The committee is strongly committed to returning inflation to its 2% objective.”

Did the Fed give up on inflation? After all, it no longer expects to reach its own target, and merely mentions its commitment.

Dot-Plot Sees Steeper Rate Hikes

The statement was accompanied by the unemployment rate and much slower economic growth this year compared with the March forecast.

What’s more, the FOMC participants see inflation now as even more persistent because they expect 5.2% stagflation more likely to occur, which should be positive for gold prices.

Last but not least, a more aggressive tightening cycle is coming. According to the fresh dot-plot , the forecasted path of the federal funds rate will become steeper as it’s expected to reach 3.4% this year and 3.8% next year, compared with 1.9% and 2.8% seen earlier. It implies an additional 150 basis points of hikes in 2022 relative to the previous forecast and almost 180 basis points to the current level of 1.50-175%.

Hence, to fulfill the implied projection in the dot-plot, the Fed would have to hike interest rates by about 50 basis points at each meeting scheduled this year, or even more, given that the Fed has so far underestimated the level of inflation and interest rates. Even with 3.4%, the U.S. central bank would stay accommodative given the level of inflation – according to the Powell’s press conference . He reiterated a few times how the Fed is committed to combating inflation and announced either a 50- or another 75-basis point hike in July:

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We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy. Clearly, today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common. From the perspective of today, either a 50- or 75-basis-point increase seems most likely at our next meeting.

Powell also acknowledged that engineering a soft landing could be more challenging:

Do I still think that we can do that? I do. I think there’s. I don’t want to be the handicapper here,. That is our objective and I do think it’s possible. Like I said though, I think that events of the last few months have raised the degree of difficulty, created great challenges, and again, the answer to the question, can we still do it, there’s a much bigger chance now that it’ll depend on factors that we don’t control, which is fluctuations and spikes in commodity prices could wind up taking that option out of our hands.

Implications For Gold

What does it all mean for the gold market? Well, the Fed held the most hawkish meeting in almost 30 years, but gold held its ground. The central bankers hiked interest rates by 75 basis points and raised its forecasted level of appropriate federal funds rate from 1.9 to 3.4% by the end of this year. In addition, Powell announced that the Fed will likely hike interest rates by either 50 or 75 basis points in July. Despite all this hawkish news, gold didn’t plunge, as one could expect. As the chart below shows, the price of the yellow metal actually increased slightly from the week before.

Why? Well, the main reason is that such a steep increase indicates that the Fed has finally noticed the inflation threat and decided that the situation is so serious that a bold, unusual move is warranted. However, such steep hikes make a soft landing less likely and prompt traders to increase their bets that a , supporting its prices.

Another positive aspect for gold is that steeper hikes bring us closer to the According to James Bullard , St. Louis Fed president, front-loading could lead to policy easing in 2023 or 2024. The peak in the Fed’s hawkishness may arrive even sooner, as Powell said during his press conference: “Today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common.”

So, I believe we will only see one such large move before the Fed raises rates by 50 or 25 basis points for a couple of months. When the about-turn in U.S. , especially since the reversal may occur in an inflationary environment.

Written By: Sunshine Profits