(Kitco News, Wed. June 15th, 2022) – The gold market is holding its ground and modest gains as the Federal Reserve raises interest rates by 75 basis points and signals further aggressive rate hikes through the rest of the year to cool inflation pressures.
Markets only started to price in a 75-basis point move two days ago, and with inflation hitting a fresh 40-year high, the U.S. central bank quickly met market expectations.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent 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 percent and anticipates that ongoing increases in the target range will be appropriate,” the central bank said in its monetary policy statement. “The Committee is strongly committed to returning inflation to its 2 percent objective.”
Along with June’s move, the central bank’s updated projections show the Committee sees the Federal Funds rate pushing to 3.4% this year. Federal Reserve’s interest rate projections, also known as the dot plots, have jumped from March’s forecast of 1.9%.
The gold market is holding on to modest gains, seeing little movement following the central bank’s latest move and updated projections. August gold last traded at $1,817.50 an ounce, up 0.22% on the day.
While the Federal Reserve signals further aggressive monetary policy tightening, it has lowered its growth forecasts for this year and 2023 and raised its inflation outlook.
The U.S. central bank now sees the U.S. economy growing 1.7% this year and 1.7% next year. Estimates are down from March’s GDP forecast of 2.8% and 2.2%, respectively. Economic growth was also downgraded for 2024 to 1.9%, compared to the previous estimate of 2.0%.
At the same time, inflation pressures have risen sharply. The U.S. central bank sees core inflation, which strips out volatile food and energy prices, rising 4.3% this year compared to March’s estimate of 4.1%. Core inflation will remain elevated, rising 2.7% in 2023 from the previous forecast of 2.6%. Looking to 2024 is expected to rise 2.3%, unchanged from March’s forecast.
Overall consumer prices are expected to rise 5.2% this year, up from March’s forecast of 4.3%. Next year, headline inflation is expected to rise 2.6%, down from the previous estimate of 2.7%. By 2024 inflation is expected to rise 2.2%, down from the last forecast of 2.3%.
The Federal Reserve sees a fairly stable labor market in the next two years, with the unemployment rate rising to 3.7% this year, up from the March projection of 3.5%. The unemployment rate is expected to tick higher to 3.9% in 2023, up from the previous estimate of 3.5%. By 2024 the unemployment rate is expected to be 4.1%, up from the previous estimate of 3.6%.
Although the U.S. central bank is taking a solidly hawkish stance against inflation, some economists are questioning if they are sincere in their outlook. Economists at CIBC said the media Fed Funds Rate at 3.4% is not likely to be achieved.
“Too many inflation reports that tested the Fed’s patience have it adopting the Olympics slogan of “faster, higher, stronger” for its stance on rate hikes,” the economists said. “While we see that as overkill and unlikely to materialize, another 75bp move at the next FOMC, and a peak of 3.25% for the fed funds ceiling attained this year, now seems likely before Powell’s team sees enough signs of a slowing to stop at that level.”
Posted by:
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com