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Fed is talking down inflation, but talk is still cheap

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(Kitco News) - At first blush, it appears that the Federal Reserve's tough stance on inflation is working as long-term expectations have come down slightly.

Friday, The University of Michigan released its revised consumer sentiment survey, which showed five-year inflation expectations falling back to around its historical average of 3.1%, down from the preliminary estimate of 3.3%.

Kristina Hooper, Chief Global Market Strategist at Invesco, pointed out this week that this one inflation data point has become an important number to watch. It was one of the main reasons the Federal Reserve raised interest by 75 basis points at its meeting earlier in the month.

Although the Fed still has a lot more work to do to cool down inflation, it might not have to be overly aggressive as it tightens monetary policies. This is good news for the gold investors because if inflation does start to weaken, the U.S. central bank could slow the pace of interest rate hikes.

This week, analysts noted a lot of complacency in the gold market. Although prices remain well supported at around $1,800, as equity market volatility drives the precious metal's safe-haven demand, analysts have said there is no sense of urgency for investors to buy gold.

A less aggressive Fed later this year could be the spark that ignites a new rally. This week Fed Chair Jerome Powell reiterated the central bank's stance that it is committed to using its tool to bring down inflation; however, many economists don't believe Powell would raise interest rates high enough to cause a recession.

Billionaire investor and head of the Baupost Group, Seth Klarman, said that while he expects interest rates to continue to move higher, there is a limit to the risks the central bank is willing to take.

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"The market has priced in five or six increases this year alone. What's hard to think about is whether the Fed will raise rates into a slowing economy and a melting-down financial market," Klarman, in a video interview with Harvard Business School. "My guess is they'll chicken out at some point."

Although the Fed continues to tough talk regarding inflation, there is only so much it can do, especially as supply chain issues continue to dominate the global economy. Gold remains well supported as abrdn warned that falling supply of critical base metals could end up leading to a global commodity war with nations worldwide chasing after the same resources.

The bottom line remains that with so much uncertainty, the gold market appears to be content to hold within its consolidation range as investors wait for the time to strike, which some analysts say could come before the end of the year.

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.