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Gold price holding $1,850 as Federal Reserve commits to price stability as inflation erodes real income

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(Kitco News) - Inflation well above the Federal Reserve's long-term 2% target continues to impact economic activity, and the central bank reiterated its stance for further aggressive monetary policy action, according to the minutes of the May monetary policy meeting.

According to some economists, the latest minutes do little to shed any new light on the future path of monetary policy. The gold market appears to be taking the hawkish stance in stride as it tries to hold support around $1,850 an ounce.

According to the minutes, the Committee continues to see upside risk for inflation and a growing threat to the economy. The members said it would be appropriate to raise interest rates by 50 basis points at the next couple of meetings. 

"Various participants remarked on the hardship caused by elevated inflation and heightened inflation uncertainty—including by eroding American families' real incomes and wealth and by making it more difficult for businesses to make production and investment plans," the minutes said. "All participants reaffirmed their strong commitment and determination to take the measures necessary to restore price stability. To this end, participants agreed that the Committee should expeditiously move the stance of monetary policy toward a neutral posture, through both increases in the target range for the federal funds rate and reductions in the size of the Federal Reserve's balance sheet."

The S&P 500 is headed lower, which is good for gold

The Federal Reserve's interest rate expectations are consistent with market expectations. Markets are pricing in three consecutive 50-basis point moves.

The U.S. central bank said that the economic outlook remains uncertain, with risks exacerbated by geopolitical uncertainty and Russia's ongoing war in Ukraine. However, the Committee struck a relatively optimistic tone on activity.

"In their discussion of the household sector, participants indicated that they expected robust growth in consumption spending. They pointed to several elements supporting this outlook, including strong household balance sheets, wide availability of jobs, and the U.S. economy's resilience in the face of new waves of the virus," the minutes said.

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