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Gold price loses gains as Fed minutes signal faster rate hikes, balance sheet reduction

Kitco News

(Kitco News) The price of gold edged down after the release of the December Federal Reserve meeting minutes signaled a possibility of earlier and faster rate hikes.

Federal Reserve officials noted that a tight labor market and high inflation in the U.S. might require faster rate hikes and a reduction in the central banks’ overall asset holdings, according to the meeting minutes released on Wednesday.

“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes stated.

The minutes revealed a more hawkish tone, with the Fed officials considering a decline in their U.S. Treasury bonds and mortgage-backed securities holdings.

“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes said.

Markets are still waiting for the Fed to comment on the impact of the omicron variant. This could come as soon as next week as Powell is scheduled to testify before the Senate Banking Committee for his nomination hearing.

In response to the news, gold erased most of its daily gains. February Comex gold futures were last at $1,816.50, up 0.10% on the day. Earlier in the session, February gold was trading at a daily high of $1,830 an ounce.

Gold price tanked last year, can Fed make metal even worse in 2022?

The December meeting marked a hawkish turning point for the Fed. The central bank announced that it would be doubling its tapering pace to $30 billion a month, which would conclude the Fed's asset-purchasing program in early 2022.

The Fed cited problematic inflation and a strong economic recovery as the main reasons for the shift in policy.

It is "really appropriate" to make this monetary policy shift due to the current state of the U.S. economy, inflation, and wages, Fed Chair Jerome Powell told reporters in December. "Price increases have now spread to a broader range of goods and services."

The updated dot-plot also revealed that Fed officials were projecting three quarter-point rate hikes in 2022.

Powell ended his December press conference by pointing out that the Fed won't be raising rates until the taper is complete. "Buying assets is adding accommodation, raising rates is removing accommodation. Since we're two meetings away from completing the taper, assuming things go as expected, if we want it to lift off before then, we would stop the taper potentially sooner. But it's not something I expect to happen," Powell said.

According to the updated projections, the Fed is looking at the real GDP to grow 5.5% in 2021 and 4% in 2022. The central bank's PCE inflation forecast was upgraded to 2.6% from 2.2% in 2022.

Live 24 hours gold chart [Kitco Inc.]

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