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Gold price drops as Powell says the Fed needs to raise rates higher, prepared to go back to bigger increases

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(Kitco News) - The gold market tumbled as Federal Reserve Chair Jerome Powell told U.S. lawmakers that interest rates are likely to be higher than previously thought.

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated," Powell testified in a hearing before the Senate Banking Committee.

Gold dropped immediately in light of Powell's comments, with April Comex gold futures last trading at $1,827,40, down 1.47% on the day.

Powell pointed to a tight labor market, solid consumer spending, manufacturing production, and higher-than-expected inflation data.

"[This has] partly reversed the softening trends that we had seen in the data just a month ago. Some of this reversal likely reflects the unseasonably warm weather in January in much of the country. Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting," Powell testified.

If these strong data trends persist, the Fed could speed up its rate increases, the Fed chair warned.

"If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time."

He added that the process of getting inflation back down to the Fed's 2% goal still has "a long way to go" and will be "bumpy."

Following Powell's testimony, markets started to price in a 66% chance of a 50-basis-point hike at the March meeting, according to the CME FedWatch Tool. This is an acceleration after the Fed decided to slow down its pace of increases to 25 bps in February.

The Fed chair also said the macro data getting released in the next two weeks is very important as it determines how high and quickly the U.S. central bank is willing to hike rates. "We'll write down the updated fed funds rate again in March. The ultimate rate will be higher than what we wrote in December," Powell said.

The monetary policy tools the Fed has at its disposal are "powerful but blunt," he added, explaining that the Fed can only target the demand side.

When asked about the crypto space, Powell noted its innovation and benefits to the economy but warned that in the short-term, there is a lot of "turmoil, fraud, and run risk."

The Fed's goal is to ensure that the regulated financial institutions take their time, are cautious in their engagement in the crypto space, and "give us prior notice."

Powell was also grilled on the U.S. debt levels and the U.S. dollar as a reserve currency. On the level of debt, Powell said the amount itself is sustainable, but the path the U.S. is on is not.

"We don't think of interest costs when we make policy. The path where the debt is growing more than the economy is not sustainable. But the level of debt we have is sustainable," he said.

When talking about the greenback, Powell confirmed that he sees the U.S. dollar as a reserve currency, adding that there was no immediate candidate ready to replace it.

"We are the world's reserve currency. That's because of our democratic institutions and our control over inflation over many years. It is the place where people want to be in times of stress," he said. "It is a very stable equilibrium, but it is not a permanent one. There isn't any obvious candidate to replace the U.S. right now, where you can have a free flow of capital in and out of the country, where you can trust the rule of law and democratic institutions, and keep price stability."

Live 24 hours gold chart [Kitco Inc.]

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