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Hawkish Powell: U.S. economy 'can handle' six more rate hikes

Kitco News

Federal Reserve Chair Jerome Powell sounded quite hawkish as the U.S. central bank raised rates by 25 basis points for the first time since 2018 and projected six more rate hikes in 2022.

The more aggressive tone was clear when Powell said that the U.S. economy "can handle" tighter monetary policy as the U.S. central bank focuses on its fight against high inflation.

And with more rate hikes right around the corner, the fed's funds rate would potentially rise to 1.9% by the end of 2022 and then climb to 2.8% by the end of 2023, Powell stated.

"The FOMC acutely feels [the need] to restore price stability," and it is prepared to use all of its tools, Powell noted at the press conference that followed the Fed's interest rate decision on Wednesday.

Despite the downside risks from the war in Ukraine, the Fed still anticipates solid economic growth of 2.8% this year. "That is still very strong economic growth," Powell said, adding that the FOMC's projection for 2023's GDP growth is at 2.2%.

Powell also noted that the risk of recession is not elevated. He pointed out that the U.S. economy looks strong and "can flourish" in the face of tighter monetary policy.

One primary concern remains the war in Ukraine and its "highly uncertain" implications for the U.S. economy. And inflation plays a vital part in this.

Following Russia's invasion of Ukraine, the Fed revised its inflation expectations for this year to 4.3% from December's projection of 2.6%.

Here's Powell's breakdown of the Fed's before and after outlook:

Before the Russian invasion, the Fed saw inflation peaking at the end of the first quarter and coming down in the second half of the year. However, after the invasion, the Fed expects inflation to remain elevated through the middle of this year, start to come down at the end of this year, and drop sharply only at the beginning of next year.

"[We see] short-term upward pressure on inflation due to higher oil and other commodities prices. [There are] supply-chain issues around shipping and many countries and companies not wanting to touch Russian goods. That could push out the relief we expected on the supply chain side," Powell explained.

Markets also paid close attention to Powell's comments on the Fed's plan to reduce the central bank's nearly $9 trillion balance sheet. According to the Fed Chair, balance sheet reduction could come as soon as May — the next Fed meeting.

"The framework will look familiar, but it will be faster and come much sooner in the cycle than the last time," he said, adding that a more detailed discussion will come out in the minutes from Wednesday's meeting that will be published in three weeks from now.

Powell noted that shrinkage of the balance sheet could be equivalent to another rate hike.

What's this year's 'potential end game'? Gold price at $2,500, oil price at $50 – Bloomberg Intelligence

After digesting all the Powell-related news headlines, the gold market pared its daily losses and traded flat on the day after briefly falling below the $1,900 an ounce level. April Comex gold futures were last at $1,926.60, down 0.16% on the day as gold traders still saw many risks ahead for the Fed.

"Investors don't have to look hard to find a reason to go defensive and buy gold: monetary policy is getting restrictive, stagflation risks remain, and uncertainty over the war in Ukraine seems like it could persist for months," said OANDA senior market analyst Edward Moya.

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