Gold Prices Holding Relatively Steady As Fed Signals Two More Rate Hikes This Year
(Kitco News) - Gold prices are holding steady just below the psychological barrier of $1,300 an ounce after the Federal Reserve suggested that it will hike interest rates more aggressively this year and the next as the U.S. economy continues to grow.
Following its two-day monetary policy meeting, the Federal Reserve raised interest rates by 25 basis points Wednesday, in line with expectations. Ahead of the announcement, markets were pricing in a nearly 100% chance of a rate hike. The federal funds rate is now within a range between 1.75% and 2.00%.
More than today’s rate hike, the gold market is reacting to the Federal Reserve’s guidance on future interest rates. The median average of the central bank’s updated forecasts -- also referred to as the “dot plots” â€“ called for interest rates to end the year around 2.4%, up from March’s projection of 2.1%. The forecasts suggest the Fed will raise interest rates two more times this year.
Interest rates are expected to increase to 3.1% next year, up from the previous estimate of 2.9%. The Fed is looking for interest rates to rise to 3.4% by 2020, unchanged from the previous projections.
In another hawkish development, the Fed has also removed its forward guidence in its monetary policy statement. In its statement, the central bank said that "economic activity has been rising at a solid rate."
August gold futures last traded at $1,299.20 an ounce, relatively unchanged on the day.
Recapping the Federal Reserveâ€™s economic projections:
Along with rising interest rate expectations, the U.S. central bank is also more optimistic on economic growth and further strength in the labor market.
The Federal Reserve expects the U.S. gross domestic product to grow by 2.8% in 2018, up from Marchâ€™s forecast of 2.7%. Economic activity is projected to expand 2.4% in 2019, unchanged from the previous forecast. And the economy is expected to grow 2.0% in 2020, unchanged from the previous estimate.
The committee sees further declines the unemployment. The media forecasts expect the unemployment rate to drop to 3.6% this year, down from Marchâ€™s projection of 3.8%. The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%.
Negative for gold though is that the central bank also forecasts tame inflation pressures throughout year. With higher interest rates, this means that real interest rates will push higher. The projections show inflation rising 2.1% for the next three years. Inflation expectations are slightly higher this year compared to Marchâ€™s forecast of 1.9%.
Core inflation projection, which strips out volatile food and energy prices, is expected to tick slightly higher to 2.0% this year, up from Marchâ€™s projection of 1.9%. Inflation for the next two years is expected to remain at 2.1%, unchanged from the previous forecast.