The Fed Left Rates Unchanged — What Happened to the Gold Price?

After 10 consecutive interest rate hikes across one of the most aggressive periods for US economic policy, the Federal Reserve announced it will take a break from its tightening strategy.

The gold price sat steady after the news, but did see an increase leading up to the central bank’s decision.

“In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed said.

The Federal Open Market Committee’s statement also indicates that the Fed will keep reducing its holdings of Treasury securities, as well as agency debt and agency mortgage-backed securities.

Powell comments on Fed’s rate pause

Looking ahead, the Fed said it will continue to monitor financial stability in the US as it prepares to deliver its next policy decision in July. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” its statement reads.

According to the banking authority, readings on labor market conditions and inflation pressures and expectations, along with data on financial and international developments, will help guide its reasoning at its July 25 to 26 meeting.

Speaking to the media following the committee’s decision, Fed Chair Jerome Powell said further rate increases are possible given the economic progress seen so far this year. “In light of how far we’ve come in tightening policy … today we decided to leave our policy interest rate unchanged and continue to reduce our securities holdings,” he said.

Powell added that nearly all committee participants “view it likely” that further rate increases will be needed this year.

He also said the decision to not adjust rates at this latest meeting will give the committee a chance to review information and monitor the implications of its decisions for monetary policy. The authority acknowledged that the Fed’s aggressive rate increases have caused members of the committee to recognize “how far and fast we’ve moved.”

When asked about the benefits of the Fed taking this pause while signaling that future rate hikes are in the cards, Powell defended the central bank’s decision by saying the committee will be able to look at a longer breadth of data as it evaluates its next decision.

“The committee thought it was appropriate to moderate the pace, if only slightly,” he said.

The Fed also released economic projections on real gross domestic product growth, the unemployment rate and inflation for each year from 2023 to 2025.

What happened to gold after the Fed’s decision?

The gold price was on the rise in the hours leading up to the Fed’s decision, reaching a high of US$1,958.88 per ounce before those gains started tumbling away. The yellow metal then flipped back and forth after the Fed’s news.

As 2:30 p.m. EST on Wednesday (June 14), the gold price sat at US$1,944.57.

What will the Fed do next?

Based on Powell’s comments, it’s clear the Fed intends to base its next move on a wide range of financial data.

But in the eyes of the market, June’s decision is already being branded as a ‘skip,’ with another hike coming in July.

Speaking on BNN Bloomberg shortly before the Fed’s decision was made public on Wednesday, Karl Schamotta, chief market strategist at Corpay, said the Fed is now in an awkward position.

“Virtually everyone in the markets expects the Fed to set the stage for another hike in July, and that means that they are in a really weird position here. They might have a lot of difficulty in actually out-hawking what the markets already expect here,” he said.

When asked if he thinks the Fed will be successful in achieving a slowdown for rate expectations based on rolled-over growth, the expert said he doesn’t. “This is an impossible situation for the Fed to be in right now.”

Investor takeaway

The Fed is facing more scrutiny than ever with experts already anticipating another hike in July. Market participants will have to wait until the end of next month to see whether its latest decision is truly a ‘skip’ or a new norm.

Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.

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