After a few wavers earlier this week, gold maintained its late-August highs ahead of the Federal Reserve speeches on September 6. Ahead of the long-awaited FOMC meeting, committee members gathered mid-week to reveal opinions on future interest rate hikes.
After hitting a weekly low on Wednesday, spot gold increased by 0.1% to $1,918.68 per ounce. All the new data last week spiked the precious metal up, though the lack of news this week kept gold in a lull. On September 6, however, Federal Reserve Bank of Boston President Susan Collins released statements reaffirming the likely upcoming rate pause.
Collins believes that the central bank needs to practice caution when defining its next monetary policy steps.
“The risk of inflation staying higher for longer must now be weighed against the risk that an overly restrictive stance of monetary policy will lead to a greater slowdown in activity than is needed to restore price stability,” Collins explained. “This context calls for a patient and careful, but deliberate, approach to policy, allowing time to assess the effects of policy actions to date, and then acting appropriately.”
With that being said, Collins believes the committee remains firm on its stance of reaching the 2% inflation target. Rather than forfeiting the target or sacrificing a soft landing, the Federal Reserve should take “time to ensure that the economy is on a clear trajectory to achieve price stability,” according to Collins’ viewpoint.
The central bank has already enacted one of the most aggressive policies to date. Beginning in March of this year, the Federal Reserve increased its target at such a sharp rate that we’ve already reached a level not seen in the last 40 years. Now, the current interest rate sits between between 5.25% and 5.50%, leaving little wiggle room for another rate hike.
Many committee members seem to agree with Collins’ view on the state of the economy. Fed members recognize the cooling inflation levels and improving job market conditions despite the still-high pricing pressures.
Right now, the Federal Reserve seems fairly confident in its stance on maintaining rates in September, assuming no shocking data comes in. What the committee doesn’t know is what will come next. Right now, Fed members are unsure whether another hike will be necessary or if the current rate will suffice.
Federal Reserve Governor Christopher Waller believes that the latest data is “going to allow us to proceed carefully.” Waller added that “there’s nothing that is saying we need to do anything imminent anytime soon, so we can just sit there, wait for the data, see if things continue” according to the current policy trajectory.
Waller continued to explain that we must proceed cautiously before assuming that one or two months of positive data means anything. Whether the Federal Reserve decides to hike rates again “depends on the data. I mean, we have to wait and see if this inflation trend is continuing,” Waller explained. “I want to be very careful about saying we’ve kind of done the job,” adding that he wants to see “a couple of months continuing along this trajectory before I say we’re done doing anything.”
Collins agrees with Waller’s view on the recent inflation improvements. Sustained economic growth takes time. One month of positive data doesn’t mean anything in the grand scheme of things.
“While we are seeing some signs of moderation, demand continues to outpace supply, creating price pressures,” Collins noted. “My view is that it is just too early to take the recent improvements as evidence that inflation is on a sustained path back to 2%.”
Collins will not vote during the upcoming rate decision. That being said, the Federal Reserve Bank of Boston President hopes the committee can achieve its inflation target without disrupting the economy and labor market too much. To achieve this, Collins believes a gradual slowdown is vital.
“I do not believe a significant slowdown is required,” Collins explained. “Price stability is achievable with an orderly slowdown and only a modest unemployment rate increase – ideally preserving some of the favorable labor supply dynamics.”
Collins expects to see some signals of the economy returning to normal by the end of the year as conditions begin responding to the Fed’s policies from earlier this year. “I do expect to see slowing growth by the end of this year and throughout 2024,” Collins stated.
If such plays out as expected, we may see sustained growth from gold prices by next year as interest rates settle. As always, investors should consult their advisors before making any portfolio moves.