Investors have a delayed reaction to Wednesday's Federal Reserve announcement

Apparently, it took a day for investors to fully digest and react to yesterday’s FOMC statement and updated economic projections for 2023 – 2025. Chairman Jerome Powell did not mince words yesterday delivering an exceedingly tough and hawkish written statement as well as responses to reporter's questions.

The reaction to all of the hawkish information provided by the Federal Reserve was tepid at best. This was reflected by only fractional declines in stocks and gold. While both stocks and precious metals prices traded lower yesterday the declines were muted and the declines were fractional. Major U.S. indexes declined under a percent. Gold’s futures declined by only $8.00 per ounce.

The magnitude of the message expressed by the Federal Reserve certainly was reflected in the financial markets today. The dollar strengthened, and all of the major stock indices sustained deep declines. The NASDAQ composite lost 3.23%, the Dow declined by 2.25%, and S&P 500 dropped by 2.49%. Gold futures lost 1.75%.

As of 5:05 PM EST, the most active February 2023 Comex contract is currently down $31.60 and fixed at $1787.10. Silver futures basis the most active March 2023 Comex contract sustained a decline of 3.55% or $0.85 and is fixed at $23.28 per ounce. Concurrently the dollar gained 0.80% with the dollar index currently fixed at 104.565.

It is perplexing that it would take the investment community a full day to digest the implications and potential outcomes from the latest economic projections by the Federal Reserve. The Fed released a written statement as always but included a separate PDF file titled “Federal Reserve Board and Federal Open Market Committee release economic projections from the December 13-14 FOMC meeting”.

The PDF contained the most recent Federal Reserve “dot plot”. This graph reveals the most recent assessments made by each Federal Reserve official. This graph showed that there was a unanimous consensus to keep the Fed’s benchmark rate elevated throughout the entire year of 2023. Furthermore, they anticipated that the first-rate reduction would probably not occur until the second quarter of 2024.

When you combine the exceedingly hawkish demeanor of the Federal Reserve’s monetary policy with the recent reports indicating strong economic contractions it raises the probability of a hard-hitting recession next year or at the beginning of 2023. Investors who participate in gold are reacting to elevated and sustained higher rates next year which creates bearish market sentiment, if the Federal Reserve’s actions lead to a recession that market sentiment will pivot because gold typically moves higher in a recession.

Wishing you as always good trading,