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Gold Prices Jump As Fed Leaves Rates Unchange But Lowers IOER

Kitco News

(Kitco News) - Gold prices have jumped into positive territory, after the Federal Reserve signaled its patient approach to interest rates and continued to signal cautious optimism regarding the U.S. economy.

As expected the U.S. central bank left interest rates unchanged within a range between 2.25% and 2.50%. At the same time the bank continue to note positive economic growth.

“Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate,” the central bank said in its monetary policy statement.

Gold prices were relatively unchanged on the day a head of the report and have jumped into positive territory in initial reaction. June gold futures last traded at $1,286.70 an ounce, up 0.09% on the day.

According to some economists, markets could be reacting to the fact that the central bank cut its Interest rate on excess reserves to 2.35% to 2.40%; however, this is seen more as a technical move and not an official cut in monetary policy.

"Setting the interest rate paid on required and excess reserve balances 15 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC's target range," the central bank said in the statement.

Although the technical cut appears to be driving gold prices, the committee still sees positve economic growth for the year.

"The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes," the statement said. "In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."

Andrew Gratham, senior economist at CIBC Capital Markets, said that bond yields and U.S. dollar dropped because of the central bank’s comments on inflation, which the committee noted is running below its 2% target. This environment is positive for gold.

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