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Gold trades lower as Fed’s Bullard advocates front-loading rate hikes

Commentaries & Views

“Front-loading” is a process of distributing unevenly, with a greater proportion at the beginning of the process, and James Bullard thinks this should apply to rate hikes.

In an interview with the Wall Street Journal James Bullard, President of the St. Louis Federal Reserve said that the “Federal Reserve should not stall” on raising its rates. He said that he likes the idea of “front-loading” rate hikes saying that “the Federal Reserve should move as rapidly as it can to get its policy rate over 5% and then it can react to the data”, adding “Why not go to where we’re supposed to go. Why stall? James Bullard is not a voting member of the Fed’s interest rate committee this year.

His sentiment is also echoed by Loretta Mester, President of the Cleveland Federal Reserve who is advocating that the Fed needs to raise its interest rate a “little bit” higher than the Fed’s current target of 5% to 5 ¼%. In an interview with the Associated Press today she said, "I just think we need to keep going, and we'll discuss at the meeting how much to do”.

This goes against a central message presented by many officials of the Federal Reserve last year. The latest message delivered by Chairman Powell expressed that the Fed intended to slow the pace of interest-rate hikes in 2023. This message was reinforced today by Patrick Harker the president of the Philadelphia Federal Reserve. Reuters news reported that “he‘s ready for the U.S. central bank to move to a slower pace of interest rate rises amid some signs that hot inflation is cooling off”.

Currently, analysts and market participants are anticipating that the Fed will raise rates by ¼% at the next FOMC meeting. This is in alignment with the CME’s FedWatch Tool which is forecasting a 93.3% probability of a 25-bps rate hike, and a 6.7% probability of a 50-bps rate hike by the Fed at their next meeting.

The Federal Reserve raised its benchmark rate more aggressively last year than any other time since the 1980s. Beginning in March 2022 the Fed raised rates at every FOMC meeting with four consecutive jumbo 75-bps rate hikes. This took the Fed’s benchmark rate from 0-25 bps in February to 425-450 bps by the end of the year. The Federal Reserve is currently anticipating that they will raise rates until they reach their target of 5 ¼ to 5 ½% this year.

The mixed messages sent by Federal Reserve officials have raised concerns that the Federal Reserve will backpedal the idea of slowing down the pace of interest-rate hikes.

This has pressured gold prices to drop over the last two days. After hitting an intraday high yesterday of $1931 the price of February gold futures has softened considerably. As of 3:50 PM EST, the most active futures contract is currently fixed at $1905.60, after factoring in yesterday’s decline and an additional $4.10 today. If the price of gold futures breaks below $1900 it could decline to approximately $1880 which is the next technical level of support.

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