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Gold prices drop into negative territory as Federal Reserve sees terminal rate above 4.5% in 2023

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(Kitco News) - The gold market is under pressure falling below critical long-term support at $1,675 an ounce as the Federal Reserve raises the Fed Funds rate by another 75 basis points and signals that more aggressive rate hikes will continue through year end.

The rate hike was largely expected as the U.S. central bank has been clear that its current priority is to slow the economy to cool persistent inflation pressures.

Looking beyond today’s monetary policy decision, updated economist forecasts shows the central bank sees significantly higher rates through 2024. The Federal Reserve’ interest rate projections, also known as the dot plot, sees the Fed Funds rate rising to 4.4% by the end of this year, up from the previous estimate of 3.4%.

Looking at 2023, the Fed Funds rate is expected to rise to 4.6%, up from June’s estimate of 3.8%. Interest rates for 2024 are expected to come in at 3.9% up from June’s projection of 3.4%. In the first look at 2025, the Fed sees interest rates rising 2.9%, which is slightly higher than expected long-term rate of 2.5%.

Adam Button, chief currency strategist noted that a terminal rate of 4.6% is much higher than what markets were previously expected, looking for a peak of around 4%. He added that the hawkish tilt to the projections has pushed the U.S. dollar to a fresh 20-year high.

Despite a strong start to the day, the gold market has not been able to withstand constant selling pressure ahead of the U.S. central bank’s monetary policy decision. December gold futures last traded at $1,668 an ounce, down 0.18% on the day.

Along with further monetary policy tightening, the central bank’s updated economic projections shows higher inflation pressures and lower growth through 2024.

The U.S. central bank now sees the U.S. economy growing 0.2% this year, down from June’s forecast of 1.7%. U.S. GPD is expected to 1.2% in 2023 down from the previous estimate of 1.7%. Economic growth was also downgraded for 2024 to 1.7%, compared to the previous estimate of 1.9%. For 2025 the central bank sees GDP growing 1.8%.

At the same time, inflation expectations continue to rise. The U.S. central bank sees core inflation, which strips out volatile food and energy prices, rising 4.5% this year compared to June's estimate of 4.3%. Core inflation will remain elevated, 3.1% in 2023 compared to the previous forecast of 2.7%. Looking to 2024, core consumer prices are expected to rise 2.3%, unchanged from June's forecast. Core inflation is expected to moderate to 2.1% by 20254.

Overall consumer prices are expected to rise 5.4% this year, up from June's forecast of 5.2%. Next year, headline inflation is expected to rise 2.8%, up from the previous estimate of 2.6%. By 2024 inflation is expected to rise 2.3%, a tick higher from the last forecast of 2.2%. Consumer prices are expected to rise 2.1% in 2025.

The Federal Reserve continues to see a fairly stable labor market in the next three years, with the unemployment rate rising to 3.8% this year, up from the June projection of 3.7%. The unemployment rate is expected to rise and hold at 4.4% in 2023 and 2024, up from the previous estimates of 3.9 and 4.1% respectively. of 3.5%. For 2025 the unemployment rate is expected to rise 4.3%.

“Projections for interest rates and economic variables show that participants now believe higher rates and a near brush with recession will be needed to bring inflation back down to a 2% target,” said Andrew Grantham, senior economist at CIBC.

Michael Pearce, senior U.S. economist noted that the updated projections are solidly hawkish as the central bank sees another 75-basis point hike and 50 basis point hike in November and December.

“The Fed believes it will need to raise rates a little further and see economic growth weaken by more than it previously thought to bring core inflation back close to the 2.0% target over the next two to three years.  In turn, the Fed’s continued hawkishness suggests that we will need to revise our own projections for the Fed funds rate higher than the 4.00-4.25% peak we currently have pencilled in, which will add to the downside risks to growth too,” said Pearce.

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