The FOMC decelerated the pace of rate hikes from 50 to 25 basis points. Is it time to accelerate gold purchases?
The first FOMC meeting in 2023 is already behind us! The key change in the fresh monetary policy statement is that the Fed hiked the interest rates by 25 basis points and not by 75 or 50 basis points as last year. It means that the target range for the federal funds rate has increased to 4.50-4.75%:
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 4-1/2 to 4-3/4 percent.
There are two more modifications in February’s monetary policy statement. First, the Fed acknowledged the slowdown in inflation, writing that “inflation has eased somewhat but remains elevated”. Second, the U.S. central bank dropped the narrative citing the war and related events as direct contributors to rising prices. Instead, the statement just says that “Russia's war against Ukraine is causing tremendous human and economic hardship and is contributing to elevated global uncertainty.” Although not very surprising, these changes are dovish and, thus, positive for gold prices.
Gold Jumps above $1,900 after FOMC
The softer move in the federal funds rate was in line with the market expectations, especially after recent softer inflation data and many FOMC members’ comments that signaled a slowdown in the pace of interest rate hikes.
But gold still managed to rally. After the release of the statement, it jumped 1.3% from slightly below $1,925 to about $1,950. The day earlier, gold moved up from slightly above $1,900, so gold gained 2.6% in just two days, as one can see in the chart below (courtesy of goldpriceforecast.com).
Why did gold jump if the Fed’s slowdown was expected? Well, some investors were worried that the Fed would hike the interest rates by 50 basis points, so we could see a relief rally. What’s more, the FOMC signaled that any future rate increase would be in 25 basis points increments, as it dropped a reference to the “pace” of future increase and instead referred to the “extent” of rate changes.
In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Last but not least, in his press conference, Powell admitted that disinflation has started and that the Fed may only be “a couple of more rate hikes” from the terminal rate. Such remarks were welcomed by the gold bulls.
Implications for Gold
What does it all mean for the gold (and silver) outlook for 2023? Well, the price of gold has been rising since November 2022 (as the chart above shows). And the recent FOMC statement could only make more room for further rally. This is mainly because it took the 50-basis points hikes off the table. And Powell failed in convincing markets that there will be more than one rate hike and that there will be no cuts in the interest rates this year. Of course, markets could be wrong, but, on the other hand, Powell and his colleagues have to flex their muscles, even if everyone knows that they will blink if the recession arrives. Anyway, gold’s upward move could continue as long as this narrative dominates.
Arkadiusz Sieron, PhD