FOMC Sees Two Rate Hikes For 2023 - Gold Didn’t Like It

The newest Fed’s statement and dot-plot indicated a much more hawkish tone among the FOMC members than the markets expected, and gold dropped. On Wednesday, June 16, the FOMC has published its newest statement on monetary policy. The statement was barely changed from previous editions. The main alteration was that the Fed ceased saying that “the pandemic is causing tremendous human and economic hardship across the United States and around the world.” 

Furthermore, with the CPI annual rate jumping to 5% in May, the US central bank acknowledged that inflation is no longer “running persistently below this longer-run goal.” Hence, both modifications are slightly hawkish, as the Fed noticed an improvement in the epidemiological situation, as well as higher inflation. Bad news for gold.

However, the statement was only slightly changed, so investors focused more on the accompanying dot-plot and Powell’s press conference instead. According to fresh economic projections, the Fed forecasts higher GDP growth and higher inflation this year, as the table below shows.

As one can see, the FOMC expects that GDP will soar 7% in 2021, compared to a 6.5% rise expected in March. They also assume that the pace of economic growth will be slightly higher in 2023. Meanwhile, the Fed officials believe that the PCE inflation (core PCE) will jump to 3.4% (3%) this year, compared to 2.4% (2.2%) seen in March. They also forecast a slightly lower unemployment rate in 2022.

But the most impacting change occurred in the expected path of the federal funds rate. The FOMC members now forecast that the US policy rate will be 0.6% at the end of 2023, an important upward change from the 0.1% projected in March. In other words, US central bankers believe that two interest rate hikes will be appropriate in 2023. This means that they began to think about tapering, which is fundamentally negative for gold prices.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does ...

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