Gold Prices Hold $1,200 As Fed Raises Rates; Leaves Forward Guidance Relatively Unchanged
Wednesday, in a widely expected move, the Federal Reserve raised interest rates by 25 basis points, bringing the federal funds rate to a range between 2.00% and 2.25%. U.S. interest rates are at their highest level in nearly a decade.
The central bank was also optimistic on the U.S. economy, reiterating that “economic activity has been rising at a strong rate."
However, the gold market is expected to react to the Federal Reserve’s guidance on future interest rates. The median average of the central bank’s updated projections – also referred to as the “dot plots” – calls for long-term interest rates to rise to 3.00% up from June’s forecast of 2.9%.
Gold was under modest selling pressure ahead of the data and is seeing only modest buying in initial reaction. December gold futures last traded at $1,203.50 an ounce, down 0.13% on the day.
Federal Reserve’s economic projections:
The Federal Reserve is more optimistic on growth to the end of the year. The central bank sees U.S. gross domestic product to grow by 3.1% in 2018, up from June’s forecast of 2.8%. Economic activity is projected to expand 2.5% in 2019, up a tick from June’s forecast of 2.4%. Expectations for growth in 2020 remained unchanged at 2.0%. In its first look at 2021 the central bank expects the economy to grow 1.8%.
The committee sees the unemployment rate moving slightly higher this year. The media forecasts expect the unemployment rate to come in at 3.7% this year, up slightly from June’s projection of 3.6%. The rate is estimated to fall 3.5% next year, through to 2020, unchanged from June. The unemployment rate is expected to tick up to 3.7% by 2021.
Negative for gold though is that the central bank also forecasts tame inflation pressures throughout the year. With higher interest rates, this means that real interest rates will push higher. The projections show inflation rising 2.1% for this year and then falling to 2.0% next year before pushing back to 2.1% in 2020 and 2021.
Core inflation, which strips out volatile food and energy prices, is expected to reach 2.0%, unchanged from June’s projections. Inflation for the next three years is expected to remain at 2.1%, unchanged from the previous forecast.
Andrew Grantham, senior economist at CIBC World Markets, said that the statement held little surprises for investors. However, he added that markets appear to be keying on the fact that the fed could start to be a little cautious as monetary policy pushes closer to 3%.
“Even though the messaging regarding longer term prospects for interest rates seems a little mixed, markets appear to be paying more attention to the dropping of policy remaining accommodative, seeing the US$ and bond yields fall slightly,” he said.