Gold and US Stocks Retreat Following Interest Rate Hike Announcement

December 14, 2016 - 5:17pm

 by Gary Wagner

The Federal Reserve’s final FOMC meeting for 2016 concluded today. In a largely anticipated move, the Fed announced an interest rate hike of 25 basis points (.25%). This rate hike accompanied statements containing their new economic forecasts.

With this unanimous decision, Fed officials raised interest rates for the first time this year. They also laid out their current economic forecast. Of great interest was a more hawkish forward policy than originally anticipated.

US equities and gold had been trading quietly with little change just prior to the conclusion of today’s FOMC meeting. In fact, the Dow Jones Industrial Average came within 34 points of that elusive number 20,000, and gold had been trading unchanged to roughly $2 higher.

This knee-jerk reaction moved the Dow Jones Industrial Average down over 150 points on an intraday basis. This news also moved gold pricing sharply lower, trading off about $8 within the first hour of the FOMC meeting’s conclusion.

Whereas we saw prices slightly recover in US equities as they moved off their intraday low to close at 19792, a 118-point loss on the day, gold pricing did not recover from its initial abrupt reaction and continued to trade lower throughout the trading session. As of 4:00 Eastern Standard Time, gold is trading off $14 dollars at 1144.70.

Dot Plot: Three Dots Rather than Two

Although today’s interest rate hike was largely anticipated, and for the most part factored into current pricing, an unanticipated hawkish tone emerged from today’s meeting. It was announced that the Federal Reserve has raised their projection of interest rate hikes next year from two to three. This new policy moved US equities, gold, and bonds sharply lower.

Three Dots Move US dollar and Two Year Treasuries to Higher Ground

This more hawkish stance also sent the US dollar to new highs not seen since 2003, closing up over 1.1%. The US Dollar Index closed at 102.20. US two-year Treasuries also rose dramatically to close above highs not seen since 2009.

Inasmuch as a quarter percent rate hike was largely anticipated, and factored into current market pricing, the more hawkish tone created by a policy with three rate hikes next year rather than two was not. Although Janet Yellen made it clear in her press that the Fed’s, “policy remains accommodative,” and that this policy, “is not on a preset course,” the news of this more hawkish stance resulted in dramatically lower equities in gold prices, a dramatically higher US dollar, and higher two-year Treasury prices.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

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