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Gold price has a path to $2,200 after Fed revealed its strategy - SSGA's Milling-Stanley

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(Kitco News) - The Federal Reserve has laid out a clear tightening path, and now gold prices are free to push to new highs above $2,000 an ounce as inflation will remain a clear threat to consumers, according to one market strategist.

In a telephone interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said Wednesday's monetary policy decision was slightly more hawkish than he expected; however, he added that it was a lot more dovish than market outlook.

As expected, the Federal Reserve raised interest rates by 25 basis points. At the same time, it signaled that it could start reducing its balance sheet at the next meeting. The central bank also updated its economic projections, lowered its growth forecast and raised its inflation expectations for 2022. Finally, the central bank also sees the potential for seven rate hikes this year.

While this might sound hawkish, Milling-Stanley said it wouldn't be enough to frighten the gold market.

"If indeed the Federal Reserve does follow through with its plan that will put interest rates at 1.75% by the end of the year," he said. "Interest rates will remain under 2% this year. I don't think markets have much to worry about."

Milling-Stanley said that the gold market is reacting as he expected it. With the Fed's blueprint laid out, investors can now focus on the growing inflation threat, he added.

In December, Milling-Stanley's team at State Street Global Advisors saw goldgold prices trading between $1,800 and $2,000 an ounce through 2022. However, He said that because of Russia's war with Ukraine, which is adding to the already red-hot inflationary environment, it looks like his bullish case for gold to trade between $2,000 and $2,200 is becoming a more substantial reality.

"Now that we've got the reality of the first-rate and we know what's in store for next nine months, we will now focus much more closely on inflation numbers. That's probably the right thing to be focusing on," he said.

Last week, the U.S. Consumer Price Index showed annual inflation rising 7.9% in February, hitting another new 40-year high. Milling-Stanley added growing indications suggest inflation will remain elevated through the rest of the year.

Gold price down but not out as Federal Reserve starts tightening cycle and lowers 2022 growth forecast and raises inflation expectations

He added he expects rising wages in the face of rising commodity prices to keep inflation elevated longer than the U.S. central bank expects. While the Fed sees inflation rising above 4% this year, it sees a much smaller rise of 2.6% for 2023.

"I think there is a lot more to inflation than just supply disruptions," he said. 

Although inflation can still rise, Milling-Stanley said that the Fed will maintain its cautious plan to keep recession threats under control.

"With CPI at 7.9%, [Federal Reserve Chair Jerome] Powell had to do something. But he will remain cautious when it comes to fulfilling his dual mandate," he said. "The Federal Reserve can only move gradually."

While inflation will remain elevated, Milling-Stanley said that he doesn't see an environment like the 1970s where it spiraled out of control, forcing the U.S. central bank, under Paul Volcker, to rates to almost 20%.

"We had inflation baked into the system in the sixties and seventies, for the best part of a 20-year period, that is quite long enough to firmly entrenched inflationary expectations," he said. "Volker was dealing with inflation at 16%, 17%, 18% a year. In the U.K., we had inflation of 25% a year for three years in a row. We are nowhere near those levels."

Along with the growing inflation threat, Milling-Stanley said that falling global growth forecasts due to Russia's invasion of Ukraine will continue to support speculative investment demand for gold.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.