What to expect from the September FOMC Meeting, and how might gold respond

The Federal Reserve will conclude its September FOMC meeting and release a written statement at 2 PM EDT tomorrow. This will be followed by Chairman Powell’s press conference a half-hour later. It is widely anticipated that the Federal Reserve will raise the “Fed funds rate” by 75 basis points. The CME’s FedWatch tool is forecasting that there is an 84% probability of a 75-basis point hike, and a 16% probability that the Fed will raise rates by a full percentage point.

In the unlikely event that the Federal Reserve raises its benchmark interest rate by 1%, it would most certainly pressure gold to lower pricing. According to MarketWatch, “economists at the brokerage Nomura Securities … became the first on Wall Street to predict a full-percentage-point increase in the Fed’s benchmark short-term rate.”

However, if the Fed raises rates by 75 basis points as expected market participants could see some short-covering activity amid a relief rally. As of 5:05 PM EDT gold futures basis, the most active December contract is trading five dollars lower and is fixed at $1673.20.

The hard truth is that after four consecutive rate hikes beginning in March inflation remains extremely elevated and persistent. The latest data revealed that the CPI index had a slight decline from July’s 8.5% to 8.3% in August. While the headline CPI had a fractional decline the core CPI which strips out food and energy costs increased 0.6% more than double the prior month’s increase. This means that the core inflation rate climbed to 6.3% from 5.9% in August.

Because the August core inflation rate is three times the 2% target the Federal Reserve wants to achieve members of the Federal Reserve will continue the exceedingly hawkish tone expressed at the Jackson Hole economic symposium.

Based on the hot and persistent core inflation participants can expect to see interest rates continue to rise during the remaining three FOMC meetings in September, November, and December. The CME’s FedWatch tool is forecasting that there is a 38.9% probability that the Fed will raise rates to between 400 and 425 basis points and a 44.8% probability that rates will be between 425 and 450 basis points by December 2022.

Interest rate hikes that began in March were the primary fundamental events that resulted in a major price decline in gold. After four consecutive interest rate hikes gold has declined by approximately 19% or $400 per ounce.

In his speech last month Jerome Powell acknowledged the severe fallout of reducing inflation. “The Fed's drive to curb inflation by aggressively raising interest rates would bring some pain.”

Wishing you as always good trading and good health,