Hawaii Six O - Gary Wagner
Uncertainty wanes as investors accept the resolve of the Fed
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
For the most part, the uncertainty that defined market sentiment has pivoted to a sense of clarity about the future forward guidance of the Federal Reserve. It has become clear that the Federal Reserve will make good on its commitment to continue rate hikes and sustain those higher levels throughout this entire year. Any doubt in that the Fed would back off from its current strategy has diminished. Simply put, reality has finally set in that the Fed's words were not just rhetoric but a warning to investors that they plan to put into motion what Chairman Powell first announced on August 25 last year at the Jackson Hole economic symposium.
Jerome Powell’s keynote speech was meant to warn the American public to brace as they would begin an aggressive and hawkish process to bring inflation back down to their 2% target.
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.”
That message fell on deaf ears and was not taken seriously. Both individual citizens and corporations disregarded this message and continued to run business as usual.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
Six months after this announcement market sentiment was still under the belief that the Federal Reserve would back down and not implement the hawkish steps needed to restore price stability. Investors continued to base their decisions on the belief that the Federal Reserve would not make good on this commitment. Slowly market sentiment moved to a stance of uncertainty rather than doubt but that has now changed over the last couple of weeks.
The unfounded optimism diminished, as clarity of the upcoming steps by the Fed needed to be taken seriously. Finally, corporations and individual investors have accepted the reality that they need to brace themselves for an upcoming and continued restrictive monetary policy.
In regards to investors that have been bidding the price of gold higher, market sentiment has now incorporated the reality of higher rates that will remain throughout 2023. This most likely will take gold lower as more and more investors recognize the reality that the Fed will make good on the commitment “to do what it takes” to bring inflation down to their 2% target.
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Wishing you as always good trading,