Gold prices push to session highs as the Federal Reserve raises interest rates by 25bps provides little forward guidance
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(Kitco News) - The gold market is holding on to solid gains Wednesday after the Federal Reserve keeps its options open after raising interest rates by another 25 basis points.
As expected, the U.S. central bank raised the Fed Funds rate to a range between 5.00% and 5.25%. However, the statement provides little forward guidance in its monetary policy statement. This is the tenth time the central bank has raised interest rates in this tightening cycle.
“The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, 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.
The gold market pushed to session highs in initial reaction to the central bank’s monetary policy decision. June gold futures last traded at $2,043.10 an ounce, up nearly 1% on the day.
The Federal Reserve painted a mixed picture of the economy as it continues to monitor inflation. The committee also downplayed the ongoing banking crisis.
“Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated,” the central bank said in its monetary policy statement. “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
Although there is little forward guidance provided in the latest monetary policy statement, some analysts note that there could be dovish tilt because of what has been left out. The committee no longer “anticipates additional policy firming may be appropriate.”
“So there's still a hiking bias here but no longer an explicit nod to future hiking,” said Adam Button, chief currency strategist at Forexlive.com. “The initial reaction is dovish with the dollar falling and stocks doing a bit better. It's not a big surprise but this is as clear of a pausing signal as anyone could have hoped for.”
Ole Hansen, head of commodity strategy at Saxo Bank, described the monetary policy statement as "middle of the ground."
The #FOMC opts for the middle ground in removing pre-commitment to hike but leaves room to do so based on incoming data. The short-term interest rate market nevertheless likes the tone and adds a few more basis points to future rate cuts. Presser up next https://t.co/vF5h8qTcyf pic.twitter.com/W6LBaiogD6— Ole S Hansen (@Ole_S_Hansen) May 3, 2023
Andrew Hunter, deputy chief U.S. economist at Capital Economics, said that the central bank has provided the clearest hint that its tightening cycle has ended. He added that the next move will be a cut before the end of the year.
“We expect economic weakness and a sharper-than-expected drop back in core inflation to convince officials to start cutting rates again later this year,” he said.