Gold lower on Federal Reserve’s resolve to keep rates elevated through 2023

Gold began the trading week moving lower as market participants continue to digest and react to last week’s FOMC statement and economic projections. In essence, the Federal Reserve made it clear that they are committed to reducing inflationary pressures by continuing to implement rate hikes and then maintaining those elevated rates throughout the next year.

According to Bill Dudley, a former President of the Federal Reserve Bank of New York, last week’s FOMC reconfirmed the commitment of the Fed to take inflation to its target level of 2%.

“The message from last week’s policy-making meeting was almost entirely hawkish. The Fed’s statement retained the language of “ongoing increases,” suggesting several more interest-rate hikes. Officials projected a higher-than-expected peak rate of at least 5% to 5.25% (with greater unanimity), higher inflation for longer, lower output growth and higher unemployment.”

Bill Dudley retired from the Federal Reserve in 2018 and is now a Bloomberg Opinion columnist and senior advisor to Bloomberg economics. During his tenure, he served not only as the president of the Federal Reserve Bank of New York but also as the second in command serving as the Vice Chairman of the Federal Open Market Committee.

In his article today he addressed that the Federal Reserve can’t seem to impact or break the market's relative optimism about the outlook for interest rates. He suggested that this is a false narrative that could spell trouble ahead for investors and consumers.

“Yet despite the Fed’s clear warnings of more tightening to come, investors aren’t getting the message. Futures markets still suggest a peak federal funds rate of less than 5%, about 20 basis points lower than the Fed’s projections, with rate cuts beginning next summer.”

His opinion is that the market participants' narrative which doubts the Federal Reserve’s resolve is wrong, suggesting that this optimism has a shortcoming that could blindside the American public and make the Federal Reserve even more hawkish.

“Unfortunately, this optimism has a downside: It means that the Fed will have to work harder, tightening monetary policy more than it otherwise would, to achieve its 2% inflation objective.”

As of 5:30 PM EST gold futures basis, the most active February 2023 contract is fixed at $1796.80, after factoring in today’s decline of $3.40. Today’s modest declines contain small tailwinds resulting from dollar weakness. Currently, the dollar index is down 0.05% and fixed at 104.28.

Wishing you as always good trading,