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Gold price down but not out as Fed looks to raise interest rates soon

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(Kitco News) - Gold prices remains under pressure but is seeing little reaction after the Federal Reserve signals that it ready to raise interest rates to tame rising inflation pressures.

As expected, the Federal Reserve left interest rates unchanged at the zero-bound range; however, it signaled that markets should expect to see a rake hike “soon.”

“With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the central bank said in its monetary policy statement.

Currently markets are pricing in a hike in March with the potential for a 50-basis point move.

The central bank was also relatively positive on the current health of the economy, even as risks surrounding the COVID-19 pandemic persist.

“Indicators of economic activity and employment have continued to strengthen,” the Federal Reserve said. “Risks to the economic outlook remain, including from new variants of the virus.”

Gold prices have been struggling as the U.S. central bank lays the ground work for a new hiking cycle. Spot gold last traded at $1,831.70 an ounce down nearly 1% on the day following the Federal Reserves’ latest monetary policy statement.

Along with a potential rate hike in March, the U.S. central bank said it will end its monthly bond purchases in March. It also released another document regarding its plan to reduce its balance sheet.

“The Federal Open Market Committee agreed that it is appropriate at this time to provide information regarding its planned approach for significantly reducing the size of the Federal Reserve's balance sheet,” the central bank said.

In the plan the Federal Reserve said that the timing and pace of the balance sheet runoff would be in line with its goals to promote its maximum employment and price stability. At the same time, it said that the runoff wouldn’t start before the central bank starts raising rates and the plant will be implement in a predictable manner.

Michael Pearce, senior U.S. economist at Capital Economics, said that the latest monetary policy decision sets the stage for a March rate hike.

“The announcements released so far are pretty much in line with our expectations, and suggest that the Fed is still on track to deliver four rate hikes, beginning in March, and to start normalising the size of the balance sheet by mid-year,” he said.

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