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Gold price remains in neutral as Fed sees stickier inflation but not ready to raise interest rates

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(Kitco News) - Despite some volatility Wednesday, the gold market is back in neutral territory. According to some analysts, the precious metal remains supported by the Federal Reserve's November monetary policy meeting minutes.

Although the U.S. central bank started reducing its monthly bond purchase following its last monetary policy meeting, the minutes show that the committee is in no hurry to raise interest rates.

"Participants noted that beginning to scale back the pace of net asset purchases was not intended to convey any direct signal regarding adjustments to the target range for the federal funds rate. They highlighted the more stringent criteria for raising the target range, compared with the criteria that applied to beginning to reduce the pace of asset purchases," the minutes said.

Along with remaining patient on interest rates, the minutes showed that although central bankers continue to see inflation as transitory, higher prices could stick around longer than initially expected.

"Although participants expected significant inflation pressures to last for longer than they previously expected, they generally continued to anticipate that the inflation rate would diminish significantly during 2022 as supply and demand imbalances abated. Nonetheless, they indicated that their uncertainty regarding this assessment had increased," the minutes said.

The gold market is not seeing much reaction to the Federal Reserve minutes; Ahead of the latest report, the precious metal did see some technical buying that pushed prices back to neutral territory. December gold futures last traded at $1,783.20 an ounce, relatively unchanged on the day.

However, there were also some hawkish points of view presented in the minutes. Some committee members said that the central bank might have to increase the speed of its tapering process and even raise interest rates sooner than expected if inflation pressures continue to persist.

"Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee's objectives," the minutes said. "At the same time, because of the continuing considerable uncertainty about developments in supply chains, production logistics, and the course of the virus, a number of participants stressed that a patient attitude toward incoming data remained appropriate to allow for careful evaluation of evolving supply chain developments and their implications for the labor market and inflation.

While there is some talk that interest rates could rise soon than expected, most economists think the first rate hike will come in the second half of the year.
“We still think that market expectations for a series of rate hikes beginning by mid-2022 are overdone, particularly as inflation will be declining by that time, but the FOMC has clearly woken up to the realization that, even if it falls back somewhat, inflation is likely to remain above target for some considerable time,” said Paul Ashworth, chief U.S. economist at Capital Economics

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