Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Gold Holds Its Ground Despite Exceptionally Hawkish FOMC

By Sunshine Profits (Arkadiusz Sieron)CommoditiesJun 23, 2022 11:01AM ET
www.investing.com/analysis/gold-holds-its-ground-despite-exceptionally-hawkish-fomc-200626203
Gold Holds Its Ground Despite Exceptionally Hawkish FOMC
By Sunshine Profits (Arkadiusz Sieron)   |  Jun 23, 2022 11:01AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

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 FOMC meeting! Despite Fed Chairman Jerome Powell’s earlier rejection of such a scenario, the U.S. central bank raised the federal funds rate 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 50-basis point move in May and a 25-basis point liftoff in March. It was the steepest move since 1994, and in the two most recent tightening cycles, the Fed conducted only 25-basis points hikes. Hence, the recent meeting cemented a hawkish revolution within the U.S. central bank. Of course, the Fed simply had no choice, as inflation accelerated to 8.6% in May, and the Fed was, and still is, terribly behind the inflation curve. Such a bold increase was expected by Wall Street. However, the hike was not unanimous as Esther L. George preferred to raise 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 fresh economic projections made by the FOMC members. So, how do they look at the economy right now? As the table below shows, the central bankers expect a slightly higher unemployment rate and much slower economic growth this year compared with the March forecast.

Predictions For Key Economic Indicators.
Predictions For Key Economic Indicators.

What’s more, the FOMC participants see inflation now as even more persistent because they expect 5.2% PCE inflation at the end of 2022 instead of 4.3%. This is still wishful thinking, as inflation was 6.3% in April and is likely to have accelerated further in May. Anyway, slower economic growth accompanied by higher inflation makes 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 Taylor rule, the federal funds rate should be decisively above 5%! Hence, fasten your seat belt. It’s going to be a bumpy night!

Powell Announces Further Hikes

The FOMC meeting was followed up by 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:

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.

Gold Prices In 2022.
Gold Prices In 2022.

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 recession is imminent. Given the indebtedness of the economy, steep hikes could be difficult to swallow for the economy. So, the Fed walks a thin rope between high inflation and an economic downturn. The strengthening of recessionary worries increases the safe-haven demand for gold, supporting its prices.

Another positive aspect for gold is that steeper hikes bring us closer to the dovish pivot. The Fed is introducing interest rate hikes to have more flexibility in the future. In other words, the faster the U.S. central bank lifts the federal funds rate to its desirable level, the sooner it can reverse the hikes and start cutting rates. 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. monetary policy occurs, gold should rally, especially since the reversal may occur in an inflationary environment.

Gold Holds Its Ground Despite Exceptionally Hawkish FOMC
 

Related Articles

Gold Holds Its Ground Despite Exceptionally Hawkish FOMC

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (5)
Daniel Bergman
Daniel Bergman Jun 23, 2022 8:45PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
There is also talk of eliminating the Federal gas tax for a few months. Not exactly a anti inflation move. Many people are in metals for the longer haul. They don’t believe this administration has the ability to reign in inflation. If the dollar crumbles, it will do so quickly. You won’t have time to get out.
James Pattison
James Pattison Jun 23, 2022 8:36PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Loved you in game of thrones man! You were great! Lets make the little man fly!
jason xx
jason xx Jun 23, 2022 3:29PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Ya gold is doing great. Inflation has gone from less than 2% to nearly 10% and gold has gone nowhere. What an Inflation hedge....
short gold
short gold Jun 23, 2022 1:49PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
short miners and get rich high fuel cost and lower gold price = loses
Muhammad Iqbal
Muhammad Iqbal Jun 23, 2022 12:44PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Gold will rise.
Rugved Bele
Rugved Bele Jun 23, 2022 12:44PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
probably when?
Edward Chong
Edward Chong Jun 23, 2022 12:44PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email