The long-awaited September FOMC meeting finally concluded with exactly what the market expected: a rate pause. Gold rallied during the days leading up to the event as traders gained more confidence over the highly anticipated gathering. With rates finally steadying at a 22-year high rather than climbing, gold can breathe again.
On Tuesday before the meeting, the U.S. dollar slipped from its six-month high, allowing gold to edge in. The precious metal hit its highest price point since September 5, marking a two-week high just ahead of the committee gathering. With the U.S. dollar’s fall, gold became less expensive for overseas buyers, just in time for critical meetings that would take place in the U.S., Europe, and Japan later in the week.
While the entire marketplace expected the Fed’s meeting outcome, the primary center of attention was more focused on the outlook of future rate hikes. The idea of another hike later this year could drag gold’s performance, though any hints at rate cuts would help the commodity excel. Gold has an inverse relationship with high interest rates, as high rates increase the opportunity costs of buying non-yielding assets.
“Fed Chair Powell’s speech is likely to highlight that inflation risks have not gone away, but they are in a wait-and-see mode for inflation,” Michael Langford, the chief investment officer at Scorpion Minerals, explained ahead of the committee gathering.
The current biggest headwinds for reaching short-term inflation targets are concerning diesel and gasoline inventories, according to Langford.
Kirill Kirilenko, a senior analyst at CRU, a London-based consultancy, agreed with Langford’s concerns. “Should inflation become increasingly sticky, fuelled by robust consumer spending and tight labour market, the Fed may be forced to keep rates elevated for longer or even hike again to bring it to the target,” Kirilenko explained.
“Against this background, gold bulls may struggle to spark a strong price rally until the market becomes increasingly confident that the Fed is ready to ease its grip and loosen financial conditions, something we do not expect to happen in 2023.”
In the short term, we may continue to see gold teeter around the $1,900-per-ounce level until the rate cuts begin. The commodity is still holding exceptionally strong considering the 22-year-high rates.
The Federal Reserve raised interest rates 11 times this year since the beginning of the rate-hiking cycle in March. The committee has only chosen to pause rates twice, once being the most recent decision during the September meeting.
The recent meeting came with some good news and some bad news. To start with the bad news, the committee revealed new economic data showing that based on recent forecasts, the Federal Reserve may need to hit a key lending rate of 5.63% to 5.87% this year in order to reach target inflation levels. The current interest rate is at 5.2% to 5.50%, so this new information would suggest the potential for another quarter-point hike at some point in the future.
To add more salt to the wound, officials also stated their relative confidence in a soft landing, which would require fewer rate cuts in 2024. Keeping rates higher for longer is not ideal for investors.
“The new projections suggest that the Fed has a fairly strong degree of confidence in its outlook for a soft landing and, in turn, that there will be very minimal space for policy easing next year,” Seema Shah, a chief global strategist at Principal Asset Management, explained.
Now, for the good news.
On a positive note, analysts appear to be taking small hints and running with them. The Federal Reserve is still treading cautiously and sticking to its primary goal, which is to teach the target inflation level.
When actually listening to policymaker statements, it’s clear that nothing’s set in stone yet: not future rate hikes, rate cuts, soft landing goals, or anything else.
In fact, Fed Chair Jerome Powell went as far as to state that while a soft landing “was a plausible outcome,” it could be jeopardized by “factors that are outside of our control.”
“The real point, though, is the worst thing we could do was to fail to restore price stability because the record is clear on that. If you don’t restore price stability, inflation comes back,” Powell continued.
The next Fed gathering will occur in November. Whether or not rates stay the same, go up, or down is still highly unclear. According to CME’s FedWatch Tool, the current likelihood of a rate pause is 73.7%.
As always, investors should consult their advisors before making any portfolio decisions.