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Powell volatility: Gold price drops as Fed Chair says 'ultimate level' of rates will be higher than previously expected

Kitco News

(Kitco News) Gold lost all post-Fed statement gains as Chair Jerome Powell signaled that the "ultimate level" of interest rates would likely be higher than previously thought. He also said the window for a soft landing has "narrowed."

The precious metal quickly tumbled during Powell's press conference, which followed Fed's decision to raise rates by 75 basis points for the fourth time in a row. The latest hike means that the Fed has already raised rates by 375 bps since March, bringing the key policy rate to a range between 3.75%-4%.

After jumping to a daily high of $1,673.10 immediately after the announcement, December Comex gold futures then dropped to $1,639.70 as Powell was speaking to reporters Wednesday.

Powell said that even though a slowdown in rate hikes might happen in December or February, the U.S. central bank is likely to take rates higher than previously thought. "At some point … it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our 2% goal," he said. "We still have some ways to go. And incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected."

Powell also acknowledged that the window for a soft landing has "narrowed" as monetary policy has become more restrictive this year. "The inflation picture has become more and more challenging over the course of this year," he said. "That means that we have to have policy be more restrictive, and that narrows the path to a soft landing."

Fed chair's statements come after a positive gold reaction to a potential slowdown in rate hikes. In its interest rate decision, the Fed announced that from now on, the U.S. central bank will take into account "the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

This was a divergence from the previous statements, where the Fed did not put such a significant emphasis on the lag effects of monetary policy tightening.

During the press conference, Powell hinted that rate increases could be less aggressive from now on. According to him, the critical question becomes not how fast but how high to raise the policy rate and how long to keep it elevated.

"At some point, it will become appropriate to slow the pace of increases. That time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made," Powell said. "To be clear, let me say again, the question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive."

Powell also added that he doesn't think the Fed has over-tightened. And even if it did, it would be easier to fix than not enough rate hikes. "If we over-tightened, we have … our tools … [to] support economic activity. On the other hand, if you make a mistake in the other direction … then the risk really is that [inflation] has become entrenched in people's thinking," he explained.

Another hawkish point was that it was still premature to think about a pause in rate hikes, with the December meeting expected to reveal how high the Fed might raise rates.

Live 24 hours gold chart [Kitco Inc.]

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