Gold price rises as Fed delays tapering plans but pushes rate hike expectations to 2022
(Kitco News) - The gold market is struggling to find some direction with prices below $1,800 an ounce as the Federal Reserve holds back on releasing its plans to reduce its monthly bond purchase for at least another meeting.
"Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted," the central bank said in its monetary policy statement.
The delayed tapering plans come as the Federal Reserve also leaves interest rates unchanged at the zero-bound range, as expected. However, the U.S. central bank is still looking to tighten its monetary policies. According to the latest economic projections, it sees the first potential interest rate hike in 2022.
Adam Button, chief currency strategist at Forexlive.com, described the new dot plot estimates as hawkish.
Despite the hawkish outlook, gold prices are seeing some renewed buying interest following the Federal Reserve's monetary policy meeting. December gold futures last traded at $1,779.30 an ounce.
The Federal Reserve's outlook on current economic activity hasn't changed since the summer, with the committed seeing continued strengthening.
Although the Federal Reserve has delayed its tapering plans this meeting, some analysts note that committee interest rate projections could be holding gold below $1,800 an ounce. Looking at the projections, also called the dot plots, the Committee sees interest rates rising to 0.3% in 2022, up from the previous estimate of 0.1%. This would signal that the central bank sees at least one rate hike next year.
For 2023 the median estimate for interest rates is 1%, up from the June forecast of 0.6%. For 2024 the central bank sees interest rates at 1.8%.
Despite the comments in the monetary policy statement, the central bank committee has downgraded its growth expectations for the rest of 2021. According to updated economic projections, the Federal Reserve sees the U.S. gross domestic product growing 5.9% this year, down from 7% forecasted in June. Economic growth next year has been revised higher to 3.8%, up from the previous projection of 3.3%. The economy is expected to grow 2.5% in 2023, up one tick from June's estimate of 2.4%. In the first look for 2024, the central bank sees GDP growing 2%.
The U.S. central bank is also paring back its optimism in the labor market. For 2021 the unemployment rate is expected to fall to 4.8%, compared to December's forecast of 4.5%. For next year, the unemployment rate is expected to be 3.8%, unchanged from the previous forecast. In 2023 the unemployment rate is expected to fall to 3.5%, also unchanged from June's estimate. For 2024 the unemployment rate is expected to hold steady at 3.5%.
The U.S. central bank is also forecasting higher inflation pressure. The projections show that the Personal Consumption Expenditures Index (PCE) is expected to rise 4.2% in 2021, up from June's estimate of 3.4%. Inflation pressures are expected to continue to grow in 2022, with PCE increasing 2.2%, up from June's estimate of 2.1%. In 2023, the Federal Reserve expects inflation to hold at 2.2%. By 2024 consumer prices pressure are expected to moderate, rising 2.1%.
Core inflation expectations, which strip out volatile food and energy prices, are expected to rise 3.7% this year, up compared to the previous estimate of 3.0%. Next year, core inflation is expected to rose 2.3%, compared to June's forecast of 2.1%. In 2023, inflation is expected to rise to 2.2%, up from the previous estimate of 2.1%. Inflation is expected to moderate to 2.1% in 2024.
Avery Shenfeld, senior economist at CIBC, also described the latest monetary policy statement as slightly hawkish. He added that he expects the central bank will release its tapering plans at the November monetary policy meeting.
"While it's clear that the members of the committee think they will start tapering before year-end, they didn't want to commit to do so just in case the issues with the virus deepen," he said in a note to clients. "we'll stick with a view that the tapering announcement is made at the next meeting, and begins before year-end."