Gold Price Surges as Investors Interpret Fed’s July Hike as Potential End to Current Cycle

Gold prices held steady following the Fed’s decision to increase interest rates by 25 basis points, as expected. Prices for gold futures increased to $2,009.50 on Wednesday immediately following the decision. Interest rates have now risen from 5.25% to 5.50%, the highest rates we’ve seen in over 22 years, yet gold continues to outperform other asset classes, despite the increased opportunity costs.

Before Wednesday’s meeting, the marketplace anticipated the Federal Reserve to release information regarding when the rate-hiking cycle may end. Hints toward a future end would allow gold to become more attractive to buyers, hence its increase in prices already. During the meeting, committee members confirmed this stance, explaining less-hawkish views toward future hikes in September.

Currently, the Federal Reserve plans to continue its strategy of assessing marketing conditions on a case-by-case basis. The cycle may not be over yet, though it could be, depending on how economic conditions play out over the next month or two.

“I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted,” Chairman Jerome Powell revealed. “And I would also say it’s possible that we would choose to hold steady, and we’re going to be making careful assessments, as I said, meeting by meeting.”

Powell explained that the committee still aims to reach the 2% inflation target, which still “has a long way to go.” That being said, rates have eased significantly since this time last year, likely warranting a pause until September. Moving forward, the Federal Reserve plans to assess “the totality of the incoming data” in the greater context of economic activity and inflation rates to make its interest-rate hiking decisions.

“It is time for the Fed to give the economy time to absorb the impact of past rate hikes,” Joe Brusuelas, the U.S. chief economist at RSM, explained. “With the Fed’s latest rate increase of 25 basis points now in the books, we think that improvement in the underlying pace of inflation, cooler job creation, and modest growth are creating the conditions where the Fed can effectively end its rate hike campaign.”

All committee members voted on the hike unanimously, as opposed to June’s decision, which included a few disagreements over the pause. June’s statement described the economy’s growth as “moderate,” which the committee now revised to “modest.” Additional descriptions from July’s meeting included “robust” job gains and “elevated” inflation.

The last time the Federal Reserve hiked rates this aggressively was in the 1980s. At the time, the U.S. economy was crippled by similarly high inflation rates and tight economic conditions.

With the Fed’s aggressive actions have come slightly positive economic progressions, hence the hints at ending the rate-hiking cycle. The consumer price index in June increased by 3% on a 12-month basis, while last year’s rate was over 9%. Market expectations, based on a survey done by the University of Michigan, point toward additional increases of 3.4% in the near future.

Most similar figures sit within the 3% to 4.9% range, which may show significant improvements. However, they still sit well above the Federal Reserve’s 2% expectations, meaning we still have time until inflation is “over,” if that day ever comes.

With the easing in inflation rates came a rise in employment figures in recent months as well. So far this year, nonfarm payrolls have increased by 1.7 million. June’s unemployment rate sat at just 3.6%, similar to where it was this time last year.

“It has been my view consistently, that … we will be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses,” Powell explained.

U.S. Durable Goods Orders in June increased by a surprising 4.7% compared to the market’s expectation of just 1%. In May, the figure only rose by 1.8%. Core PCE data currently expects inflation rates to drop to 4.2% for June (after findings are published) compared to May’s rate of 4.6%.

With this positive economic movement and reduced expectations over future hawkish actions from the Fed, gold has gained excellent momentum. The precious metal is reaching a monthly high of $1,987.35 per ounce, pushing its $2,000 resistance line. Gold futures have already sustained above this level for the last week, hitting $2,019 last Wednesday, as traders speculated exactly what would end up taking place during the meeting.

As always, investors should consult their advisors before making any portfolio decisions.

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