(Kitco News) – The gold market is under technical selling pressure but continues to hold support above $1,800 an ounce as the Federal Reserve looks to raise the terminal rate above 5% in 2023.
On Wednesday, as expected, the Federal Reserve raised interest rates by 50 basis points to between 4.25% and 4.50%. Although the pace of rate hikes has slowed, the central bank said it continues to see more tightening in 2023.
“The committee anticipates that continued increases in the target range will be appropriate to achieve a monetary policy stance tight enough to bring inflation down to 2% over time. In determining the pace of future increases in the target range, 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 central bank said in its monetary policy statement.
The latest economic projections, also known as the “dot plot,” indicate that the central bank sees the Fed Funds rate rising to 5.1% next year, up from a September projection of 4.6%.
In other interest rate projections, the central bank sees the federal funds rate falling to 4.1% in 2024 and then falling to 3.1% by 2025. Some analysts have said that estimate poses the greater risk to gold prices in the long term as it shows the Federal Reserve will keep interest rates higher for longer.
“The FOMC projections for rate hikes at the end of 2023 contrast sharply with market prices. The market was looking for 4.28% before the Fed and they are forecasting 5.00-5.25% at the median just two points below 5%,” said Adam Button, head of currency strategy at Forexlive.com.
“Now Powell could turn the tide by introducing some uncertainty around this and saying ‘maybe we won’t have to cut as much’ if inflation falls faster than expected and growth stumbles,” he said. added Button. “But if he sticks to his guns, there’s a lot of revaluations that need to happen and we could see a lot more selling in equities and buying in US dollars.”
Paul Ashworth, chief North American economist at Capital Economics, said individual committee interest rate expectations show a greater risk that rates will continue to rise over the next year.
“The new projections were exceptionally hawkish,” he said in a note.
Ashworth noted that St Louis Federal Reserve Chairman James Bullard and Minneapolis Fed Chairman Neel Kashkari both see the federal funds rate hitting 5.75% next year.
“It’s unclear whether Fed officials really believe their own projections or whether they’re trying to reverse some of the loosening of financial conditions over the past month,” he said. “If it’s the former, reality will eventually kick in, as the disinflation evident in recent data will intensify next year. But perhaps the evidence won’t be compelling enough to persuade the hawkish Fed to step aside after a single 25bp hike in early February, as we currently expect.
Katherine Judge, senior economist at CIBC, said her bank was not changing its 2023 interest rate expectations following the latest dot charts.
“Inflation forecasts have been updated for 2023-24, so any good news on the inflation front ahead could cause policymakers to rise less than indicated in these projections,” he said. she declared. “The statement reiterated the need to factor in lags with monetary policy work as well, and we expect to see enough progress in cooling activity to require just one additional rate hike of 50 basis points, which would bring the ceiling on the fed funds rate down to 5.0%; slightly below the median projection.
As the Federal Reserve signals further monetary policy tightening, it has lowered its growth forecast for 2023 and raised its inflation outlook.
The US central bank now sees the US economy growing 0.5%, up slightly from the September forecast of 0.2%. However, the central bank drastically lowered its forecast for next year, seeing GDP rise 0.5%, down from the previous estimate of 1.2% this year. Economic growth has also been revised down for 2024 to 1.6%, from a previous estimate of 1.7%. The economy is expected to grow 1.8% in 2025, unchanged from the September reading.
At the same time, inflationary pressures continue to rise. The US central bank sees core inflation, which excludes volatility in food and energy prices, rising 4.8% this year from September’s estimate of 4.5%. Core inflation will remain high, increasing to 3.5% in 2023 from the previous forecast of 3.1%. In 2024, core consumer prices are expected to rise 2.5%, up from the previous estimate of 2.3%. By 2025, core inflation is expected to increase by 2.1%, unchanged from September.
Overall, consumer prices are expected to rise 5.6% this year, up from the September forecast of 5.4%. Next year, headline inflation is expected to rise to 3.1%, up from the previous estimate of 2.8%. By 2024, inflation is expected to increase to 2.5%, up from the last forecast of 2.3%. In 2025, consumer prices are expected to rise 2.1%, up from September’s estimate of 2.0%.
The Federal Reserve forecasts a relatively stable labor market over the next two years, with the unemployment rate reaching 3.7% this year, down from September’s projection of 3.8%. The unemployment rate is expected to remain stable at 4.6% in 2023 and 2024, up from previous estimates of 4.4%. By 2025, the unemployment rate is expected to increase to 4.5%, up from the previous estimate of 4.3%.
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