As inflation continues soaring at fierce rates, all eyes point toward the Federal Reserve to see what actions will come next. Gold prices fluctuate after every Federal Reserve meeting, particularly when they involve interest rates. With gold prices steadily above the $2,000 level, many anticipated the Federal Reserve’s announcements on May 3.
The meeting concluded with a 25 basis point hike, as expected. Gold prices shot up to $2,030 per ounce immediately following the unanimous decision. May’s interest rate hike now marks the tenth consecutive raise, bringing the range to 5 to 5.25%—the highest level it’s been since early 2007 at the start of the Great Recession.
While the interest rate hike creates ramifications across the economy, it’s the conversation around the event that truly gave rise to gold. Jerome Powell, a Federal Chairman, explained that this hike would mark a “meaningful” change, erasing his prior statement that “some additional policy firming may be appropriate.”
A quarter-point hike is a far more modest approach compared to earlier efforts from the Fed this year. After the collapse of SVB Financial, the Federal Reserve halted the aggressive half-point hikes and started back slowly with the 25-basis-point approach. Previous statements implied that we would continue seeing such efforts throughout the year, though May’s meeting said otherwise.
“The assessment of the extent to which additional policy firming may be appropriate is going to be an ongoing one, meeting by meeting,” Powell explained during the meeting. From here on out, the Federal Reserve plans to pause future hikes and only analyze data and market risks on an incoming basis to prevent overcorrections.
“In light of these uncertain headwinds along with monetary policy restraint we’ve put in place, our future policy actions will depend on how events unfold,” Powell explained.
“We have to balance the risk of not doing enough and not getting inflation under control against the risk of slowing down economic activity too much. And we thought that this rate hike, along with the meaningful change in our policy statement, was the right way to balance that,” Powel continued.
The Fed now plans to analyze small and medium-sized bank actions and credit availability to better understand market conditions.
“We are very focused on, uh, what’s happening with credit availability. Particularly, [we are watching] small and medium-sized banks, who are feeling that they need to tighten credit standards and build liquidity. What’s going to be the macroeconomic effect of that? More broadly, we will continue to very carefully monitor what’s going on in the banking system, and we’ll factor that assessment into our decisions,” Powell explained.
Understanding how credit tightening responds to rate hikes is often “complicated and adds further uncertainty,” according to Powell. With this uncertainty comes unforeseen effects. Inflation isn’t responding to past rate hikes, though reversing those actions won’t do any good, according to the Federal Reserve.
Powell still believes that the banking system is “sound and resilient,” with numerous banks now “attending to liquidity issues and taking opportunities to build liquidity” following the resolution of First Republic’s collapse.
“There were three large banks from the very beginning that were at the heart of the stress. Those have been resolved,” Powell explained. “We are very focused on what’s happening with credit availability.”
While all committee members supported this month’s rate hike, they also agreed on the potential pause. “If you add up all the tightening that’s going on through various channels, we feel like we are getting closer, or maybe even there,” Powell explained. “We’ve moved a long way fairly quickly. And we can afford to look at the data and make a careful assessment.”
Another important topic discussed during the meeting was the debt ceiling. Powell stated that the Federal Reserve would not protect the U.S. economy in a default scenario.
“No one should assume that the Fed can really protect the economy and the financial system and our reputation globally from the damage that such an event might inflict,” he explained.
In response to all of the comments revealed during the meeting, gold shot up to its record-high price for the year of $2,055 per ounce on May 4. Gold typically dips with aggressive interest rate hikes, so the mention of a pause gave rise to the shiny precious metal.
Moving forward, analysts and investors can continue monitoring financial events that may impact Federal Reserve actions. Any additional Fed strategies will likely cause gold price fluctuations.
As always, investors should consult their financial advisors before making any portfolio decisions.
