Hawkish Fed official's statements create genuine concern over larger hikes

Recent statements by the more hawkish faction of the Federal Reserve have raised genuine concerns that the current monetary policy to reduce inflation is about to undergo an unwelcome change. Multiple Federal Reserve officials have alluded to reinstating stronger rate hikes at their upcoming FOMC meetings. After seven consecutive rate hikes in 2022, the Fed raised rates by only ¼% at the first FOMC meeting of the year. Up until very recently, there was a 90% probability that the Federal Reserve would implement another ¼% rate hike at their next meeting in March.

According to the CME’s FedWatch tool, the probability of a ½% hike has now grown to 18.1%. Exactly one week ago the CME’s FedWatch tool indicated that the probability of a ½% rate hike in March was 4.2%. Market sentiment has changed dramatically believing that the Federal Reserve’s monetary policy is about to go through an extremely hawkish revision.

Yesterday Cleveland Federal Reserve President Loretta Mester said, “she would have liked the U.S. central bank to have been more aggressive at their last interest-rate committee meeting in January.” Her message was clear saying, “We have to do more to make sure inflation is on that path back to our goal of 2%,”

She is not the only Federal Reserve official to share that belief. Both regional Fed presidents James Bullard and Loretta Mester spoke to reporters following a speech to a business group in Jackson Tennessee in which they advocated 50-basis point interest rate hikes at the central banks meeting next month.

Advocates of a more hawkish monetary policy in the Federal Reserve are citing recent inflation reports that indicate that inflation is much more persistent than they had believed and not declining as quickly as their projections.

This dramatic pivot by Federal Reserve members has created a weakness in both gold and silver pricing. Gold futures have declined for the last three consecutive weeks. Traders had been unrealistically hoping for a Fed pivot. However, the recent economic data has resulted in extremely hawkish rhetoric from members of the Federal Reserve and new expectations about the upcoming rate hikes in 2023.

As of 4:28 PM EST gold futures basis the most active April contract is currently down $0.20 and fixed at $1851.60. The hawkish rhetoric by the Federal Reserve has taken gold from its high three weeks ago of $1974 and traded to a new three-week low today of $1827.

Wishing you as always good trading,