Gold price tumbles $35 as Fed's Powell says inflation 'is slightly worse' than in December, signals March rate hike

(Kitco News) Federal Reserve Chair Jerome Powell described the current inflation situation as "slightly worse" than in December, stating that there is plenty of room to raise rates without hurting the jobs market.

"There's quite a bit of room to raise interests without threatening the labor market. This is by so many measures a historically tight labor market — record levels of job openings, quits, wages are moving up at the highest pace they have in decades," Powell told reporters.

All eyes were on the Fed Chair Wednesday afternoon after the U.S. central bank held rates steady but signaled a rate hike in March.

Powell clarified the Fed's thinking around the March rate hike, stating: "The committee is of the mind to raise the federal funds rate at the March meeting."

In response to Powell's message, gold plunged more than $35, with February Comex gold futures last trading at $1,815.70, down 2% on the day. The U.S. stock market also reversed gains following Powell's press conference, with the Dow falling 0.9%, the S&P 500 down 0.8%, and the Nasdaq dropping 0.6%. 

When asked about the inflation situation in the U.S., Powell said that things are "slightly worse" than in December. "I'd be inclined to raise the 2022 core PCE by a few tenths today … It hasn't gotten better. That has been the pattern. We have to be adaptable and move as appropriate," he said.

This is going to be the year when the U.S. central bank moves "away from highly accommodative" policy. This will involve finishing asset purchases in early March and raising rates soon, with additional rate increases introduced as appropriate.

There will also be more discussion around the balance sheet runoff. "The balance sheet is still a relatively new thing for the markets and for us. We need to arrive at a timing, pace, and composition. [We'd] announce with advance notice. And we'll look to have that running in the background and have interest rates to be the active tool of monetary policy," Powell described. "I can't tell you much more … we'll be turning to all of those things at the upcoming meetings."

The Fed Chair did state that the current balance sheet is much bigger and is of shorter duration. And this is combined with a stronger economy and significantly higher inflation. "That leaves us being able to move sooner and perhaps faster [in terms of balance sheet runoff]. Beyond that, it not appropriate for me to speculate."

Powell stressed that the federal funds rate is the central banks' primary means of adjusting monetary policy, adding that "reducing our balance sheet will occur after the process of raising interest rates has begun."

Some of the ongoing risks that the Fed will continue to monitor as it proceeds to tighten its monetary policy include COVID developments, further supply chain problems, and the geopolitical tensions in eastern Europe between Russia and Ukraine.

By Anna Golubova

For Kitco News

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