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Gold price reacts: Fed's Powell says he hears inflation worries 'loud and clear,' but remains dovish

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(Kitco News) Gold rallied more than 1% on the day as Federal Reserve Chair Jerome Powell said he hears America's inflation worries "loud and clear" while still viewing these price spikes as temporary.

The August Comex gold futures were last trading at $1,826.80, up 0.93% on the day.

Powell faced a swarm of questions surrounding high inflation and what the Fed plans to do about it during his testimony before the U.S. House Committee on Financial Services on Wednesday.

The Fed chair carefully maintained his "transitory" inflation stance while pointing out that the central bank is "anxious" like everyone else to see inflation pass through and return to normal. "Right now, inflation is not moderately above 2%; it is well above 2%. The question is, where does it leave us six months from now? It depends on the path of the economy," Powell said.

Powell noted all the incoming macro data the Fed monitors have been "higher than expected and hoped" but still "consistent" with Fed's view.

He clarified that most of the price increases have been coming from a small group of goods and services directly tied to the reopening of the economy. "It's new cars, used cars, rental cars, hotels, airplane tickets," he said.

This inflationary spike revolves around semiconductor shortages, people using less public transportation, and having more money to spend.

The latest June inflation numbers once again surprised on the upside with the annual inflation running at 5.4% and the core measure, which excludes the volatile food and energy components, climbing to 4.5% — the largest increase since November 1991.

"It's just the perfect storm of high demand and low supply, and it should pass unless we think there's going to be a multi-year shortage of used cars in the United States," Powell said.

But before getting too confident, Powell said he'd like to see more narratives like the lumber prices one — where prices climbed really high and then came back down.

"Lumber prices went up and then went down. We think that will be the pattern for some of these things. I am not saying prices will come down. But we should see the level of inflation return to more normal levels," Powell stated. "That's the kind of thing that we'd like to see a lot more of."

Powell added that the Fed monitors the inflation story very carefully and will communicate any shift in thinking well in advance.

"If we were to see that inflation remains high and materially above our target for a period of time … we would absolutely change our policy as appropriate."

Powell also made sure that he remained dovish throughout his testimony, noting that the U.S. is a long way from full employment. "The unemployment rate is at 5.9%, and the true number is actually substantially above that. So we've got a ways to go."

The Fed chair did reiterate that talks around the kind of "substantial further progress" required before beginning to taper the $120 billion a month asset purchases will continue during the next several FOMC meetings.

Powell talks CBDCs, stablecoins, and crypto

According to Powell's testimony, the Fed will be releasing its highly anticipated research paper on the central bank digital currency (CBDC) in early September. The report will touch on CBDCs as well as stablecoins and cryptocurrencies, with a focus on regulation.

"We're going to address digital payments broadly," Powell said. "So that means stablecoins. It means it means crypto assets. It means the CBDC. That whole group is at a critical point in terms of the appropriate regulation."

One concern is that stablecoins are gaining popularity but are not regulated, Powell added.

"Stablecoins are a lot like money market funds or bank deposits," he said. "We have a pretty strong regulatory framework around bank deposits or money market funds, but that doesn't exist for stablecoins. And if they're going to be a significant part of the payments universe, which we don't think crypto assets will be, but stablecoins might be, then we need an appropriate regulatory framework, which frankly we don't have."

When talking about the U.S. dollar as the reserve currency, Powell once again stated that there is no good competitor out there. "We are not in danger of losing [the reserve status], certainly not to China."

Powell has another appearance scheduled for Thursday as he is scheduled to testify before the U.S. Senate Banking Committee at 9:30 a.m. ET time.

Live 24 hours gold chart [Kitco Inc.]

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