Gold prices continue to hold support above $1,800 as Fed rates rates 50bps and see a terminal rate above 5% in 2023
(Kitco News) - The gold market is seeing one technical selling pressure but continues to hold support above $1,800 an ounce as the Federal Reserve looks to raise the terminal rate to above 5% in 2023.
Wednesday, as expected, the Federal Reserve raised interest rates by 50 basis points to between 4.25% and 4.50%. Although the pace of rate hikes has slowed, the central bank said that it continues to see more tightening into 2023.
"The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee 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," the central bank said in its monetary policy statement.
The latest economic projections, also known as the "dot plot," indicates that the central bank sees the Fed Funds rate rising to 5.1% next year, up from September's projection of 4.6%.
In further interest rate projections, the central bank sees the Fed Funds rate falling to 4.1% in 2024 and then dropping to 3.1% by 2025. Some analysts have said that this estimate poses the biggest risk to long-term gold prices as it shows the Federal Reserve will hold interest rates higher for longer.
"The FOMC projections for rate hikes at year-end 2023 are a big contrast to market pricing. The market was looking for 4.28% before the Fed and they're forecasting 5.00-5.25% at the median with only two dots below 5%," said Adam Button, head of currency strategy at Forexlive.com.
"Now Powell could turn that all around by introducing some uncertainty around it and saying 'perhaps we won't have to cut that much' if inflation falls faster than expected and growth stumbles," Button added. "But if he sticks to his guns, there is a lot of repricing that needs to happen and we could see much more selling in stocks and buying in the U.S. dollar."
Paul Ashworth, chief North American Economist at Capital Economics, said that the individual committee interest rate expectations shows a bigger risks that rates will continue to move higher through next year.
“The new projections were exceptionally hawkish,” he said in a note.
Ashworth noted that St Louis Federal Reserve president James Bullard and Minneapolis Fed president Neel Kashkari both see the Fed funds rate going as high as 5.75% next year.
“It’s hard to know whether Fed officials really believe their own projections, or whether they are making a point to try and reverse some of the loosening in financial conditions over the past month,” he said. “If it’s the former, then reality will eventually intervene, as the disinflation evident in the recent data mounts next year. But maybe the evidence won’t be compelling enough to persuade the hawkish Fed to move to the side line after a solitary 25bp hike in early February, as we are currently forecasting.”
Katherine Judge, senior economist at CIBC said that her bank is not changing their 2023 interest rate expectations following the latest dot plots.
“The inflation forecast was upgraded for 2023-24, so any good news on the inflation front ahead could cause policymakers to hike by less than shown in these projections,” she said. “The statement reiterated the need to take into account the lags with monetary policy works as well, and we expect to see enough progress in cooling activity to require only one additional 50bps rate hike ahead, which would bring the ceiling on the fed funds rate to 5.0%; slightly below the median projection.”
While the Federal Reserve signals further monetary policy tightening, it has lowered its growth forecasts for 2023 and raised its inflation outlook.
The U.S. central bank now sees the U.S. economy growing 0.5%, up slightly from September's forecast of 0.2%. However, the central bank significantly downgraded next year's forecast, seeing GDP growing 0.5%, down from the previous estimate of 1.2% this year. Economic growth was also downgraded for 2024 to 1.6%, compared to the previous estimate of 1.7%. The economy is expected to grow 1.8% in 2025, unchanged from September's reading.
At the same time, inflation pressures continue to rise. The U.S. central bank sees core inflation, which strips out volatile food and energy prices, rising 4.8% this year compared to September's estimate of 4.5%. Core inflation will remain elevated, rising 3.5% in 2023 from the previous forecast of 3.1%. In 2024, core consumer prices are expected to rise 2.5%, up from the prior estimate of 2.3%. By 2025 core inflation is forecasted to rise 2.1%, unchanged from September.
Overall, consumer prices are expected to rise 5.6% this year, up from September's forecast of 5.4%. Next year, headline inflation is expected to rise 3.1%, up from the previous estimate of 2.8%. By 2024 inflation is expected to rise 2.5%, up from the last forecast of 2.3%. In 2025, consumer prices are projected to rise 2.1%, up from September's estimate of 2.0%.
The Federal Reserve sees a relatively stable labor market in the next two years, with the unemployment rate rising to 3.7% this year, down from the September projection of 3.8%. The unemployment rate is expected to hold steady at 4.6% in 2023 and 2024, up from previous estimates of 4.4%. By 2025 the unemployment rate is expected to rise 4.5%, up from the prior estimate of 4.3%.