In the unlikely event that the Federal Reserve raises its key interest rate by 1%, it would certainly push gold lower. According to MarketWatch, “economists at brokerage Nomura Securities … became the first on Wall Street to forecast a full percentage point hike in the Fed’s short-term benchmark interest rate.”
However, if the Fed raises interest rates by 75 basis points as expected, market participants could see some short-term covering amid a relief rally. As of 5:05 p.m. EDT benchmark gold futures, the most active December contract is trading five dollars lower at $1,673.20.
The hard truth is that after four consecutive rate hikes starting in March, inflation remains extremely elevated and persistent. The latest data revealed that the CPI index fell slightly from 8.5% in July to 8.3% in August. While the headline CPI fell fractionally, the core CPI that strips out food and energy costs rose 0.6%, more than double the previous month’s increase. This means core inflation rose to 6.3% from 5.9% in August.
With August core inflation three times the 2% target the Federal Reserve wants to achieve, members of the Federal Reserve will continue the highly hawkish tone expressed at the Jackson Hole economic symposium.
Based on warm and persistent structural inflation, participants can expect interest rates to continue to rise during the remaining three FOMC meetings in September, November and December. CME’s FedWatch tool projects a 38.9% chance the Fed will raise rates between 400 and 425 basis points and a 44.8% chance rates will range between 425 and 450 basis points by December 2022.
The interest rate hikes that began in March were the main fundamental events that led to a significant drop in the price of gold. After four consecutive rate hikes, gold is down about 19%, or $400 an ounce.
In his speech last month, Jerome Powell acknowledged the serious consequences of declining inflation. “The Fed’s attempt to curb inflation by aggressively raising interest rates would cause pain.”
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