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Gold price sees 1% gain as Fed's Powell talks policy normalization, controlling inflation and recession risk

Kitco News

(Kitco News) The gold market advanced to new daily highs, rising 1% on the day as Federal Reserve Chair Jerome Powell sounded upbeat on the U.S. economy, employment and promised to get inflation under control.

"This year, we see an economy where the labor market is recovering rapidly and inflation is well above 2%. This tells us is that the economy no longer needs or wants the highly accommodative policies we had in place to deal with the pandemic. But it is a long way to normal," Powell said during his nomination testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs.

Powell also warned that if inflation gets entrenched, the Fed would need to embrace a much tighter monetary policy, which could trigger a recession. "If inflation does become too persistent, that will lead to much tighter monetary policy and that could lead to a recession," he said.

The Fed chair added that price stability is also a threat to the hiring progress. "Achieving maximum employment will require price stability."

The problem with inflation comes from a mismatch between demand and supply, Powell explained, adding that the central bank will use its tools to bring inflation under control. "There's high demand for goods. Shifts in demand and a return of greater supply will help to realign these. We will get a return to normal supply conditions during the course of this year," he testified.

The Fed sees inflation pressures on track to last into the middle of this year. However, if inflation is more persistent, the central bank will raise rates more over time. "We are strongly committed to achieving our statutory goals of maximum employment and price stability. We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched," he said.

The gold market reacted positively to Powell's testimony, rising to fresh daily highs, with February Comex gold futures last trading at $1,815.10, up 0.91% on the day.

Live 24 hours gold chart [Kitco Inc.]

U.S. lawmakers grilled Powell on why the Fed underestimated inflation last year. In response, Powell admitted that the Fed did think that price pressures would be much lower by now.

"That's not what happened. The supply-side constraints have been very durable. We are not seeing the kind of progress that all forecasters thought we'd be seeing by now. We did foresee a strong spike in demand. We didn't know it would be so focused on goods," he said.

Out of the two central banks' mandates — maximum employment and price stability — inflation is the one that's further away from the Fed's goal at the moment.

Markets were also paying very close attention to Powell's take on policy normalization. And Powell did provide some hints on that front.

"We are going to end asset purchases in March. We will raise rates. And at some point this year will let the balance sheet runoff," he said. "The committee didn't make any decision on the timing. We need to be humble about that. There are risks on both sides on growth and potentially inflation as well. Going to have to be attentive to what's happening in the economy and willing to adapt as we go through the year."

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Currently, monetary policy is highly accommodative, which encourages demand that feeds into inflation, Powell pointed out. "We are trying to get to a place where we are neutral or even tight," he said.

When it comes to the Fed's balance sheet reduction, the Fed can approach it faster and quicker this time around. "We will have the ability to move sooner and a little faster this time around. More clarity is coming soon on that. We will be discussing it at the January meeting," he noted.

When asked about the U.S. debt, Powell said that the U.S. is on an unsustainable path because the debt is growing faster than the economy. He added that the time to deal with this issue is when the U.S. economy is strong.

On the highly anticipated central bank digital currency (CBDC) report, Powell said to expect it in the coming weeks, stating that it will be more of an exercise to ask questions and seek input from the public than taking positions.

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