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Gold price turns positive as Fed raises interest rates by 50 basis points

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(Kitco News) - Gold prices have pushed into positive territory as the Federal Reserve makes its biggest rate hike in 22 years.

As expected, the U.S. central bank raised interest rates by 50 basis points, pushing the Fed Funds rate to a range between 0.75% and 1%. Also as expected the Federal Reserve will reduce its balance sheet by a total of $47.5 billion.

The gold market is seeing some positive movement in initial reaction to the latest monetary policy statement. June gold futures last traded at $1,875.60 an ounce, up 0.28% on the day.

The Federal Reserve struck a optimistic tone in its monetary policy statement even as it noted that economic uncertainty remains high because of Russia’s invasion of Ukraine. The U.S. central bank also said that is it looking past the 1.4% decline in GDP seen in the first quarter of 2022.

“Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially,” the Federal Reserve said.

The Federal Reserve also noted that interest rates will continue to move higher through 2022. Currently markets see a nearly 100% chance of a 75 basis point move in June.

“With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate,” the Federal Reserve said.

Regarding the balance sheet, the Federal Reserve said that starting in June it will reduces its treasury holdings by $30 and reduce its exposure to mortgage-backed securities by $17.5 billion. The balance sheet run off will double in three months to $95 billion.

“The central bankers want to convince Americans that while they can’t do much to alleviate this year’s price pressures, they shouldn’t expect elevated inflation to persist in subsequent years, and hiking more aggressively up front is part of that messaging. Another 50 bp move seems likely at the next meeting as a result, but the statement didn’t hint at anything more than ‘ongoing increases,’” said Avery Shenfeld, senior economist at CIBC.

However, Shenfeld added that he expects as the Federal Reserve moves closer to 2%, it will slow the pace of rate hikes.

Paul Ashworth, chief U.S. economist at Capital Economics, said that he expects to see two more 50-basis point moves before the Federal Reserve’s slows its pace.

“Overall, there is nothing here to change our view that the Fed will continue with 50bp hikes at its next two policy meetings, before lacklustre real economic growth and a moderation in inflation persuade it to return to 25b hikes at the final three policy meetings this year; taking the fed funds target range to between 2.50% and 2.75% by year-end,” he said.

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