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Gold prices holding Wednesday's gains as the Federal Reserve leaves interest rates unchanged

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(Kitco News) - The gold market is holding its ground and modest gains above $1,950 an ounce as the Federal Reserve leaves interest rates unchanged and signals that it will maintain its tightening stance through the rest of the year.

As expected, the U.S. central bank left interest rates unchanged within a range between 5.25% and 5.50%. Although the central bank remains focused on inflation, the Committee appears to be laying some groundwork for a potential shift in its bias.

"In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals," the Committee said in its monetary policy statement.

The latest economic projections, also known as the "dot plot," indicate that the central bank continues to see the Fed Funds rate rising to 5.6% by the end of this year, unchanged from June's estimate. This would signal one more rate hike on the horizon.

The gold market is holding on to most of its earlier gains in initial reaction to the latest monetary policy statement and updated economic projections. December gold futures last traded at $1,963.50 an ounce, up 0.50% on the day.

Updated economic projections

While the Federal Reserve sees one more rate hike in 2023, investors should not expect to see any significant rate cut in 2024. The updated projections show the central bank committee sees interest rate ending next year at 5.1%, suggesting potentially two cuts next year. The central bank sees the Fed Funds rate ending 2025 at around 3.9%. In the first look at 2026, the Fed sees interest rates closer to their long-term average of 2.9%

The updated interest rate projections come as the central bank upgrades its growth and inflation forecasts.

The central bank remains highly optimistic about economic growth this year. The Federal Reserve sees the U.S. economy growing 2.1% this year, up from June's forecast of 1.0%. The central bank looks for more momentum pushing into 2024, with GDP growing 1.5%, up from the previous estimate of 1.1%. Economic growth for 2025 was left unchanged at 1.8%. In a first look at 2026 estimates, the central bank sees growth holding at 1.8%

At the same time, inflation pressures are expected to remain stubbornly above the central bank's 2% target, even if it starts to ease by year-end. The Federal Reserve sees core inflation, which strips out volatile food and energy prices, rising 3.7% this year compared to June's estimate of 3.9%. Core inflation will remain elevated, rising 2.6% in 2024, unchanged from the previous estimate. By 2025, core inflation is forecasted to rise 2.3%, up a tick from June's estimate of 2.2%. Inflation is expected to hit the central bank's target of 2% by 2026.

Meanwhile, headline consumer prices are expected to rise 3.3% this year, up slightly from June's estimate of 3.2%. By 2024, inflation is expected to rise 2.5%, unchanged from June's estimate. Consumer prices are expected to rise 2.2% in 2025, down slightly from the previous forecast of 2.1%. Headline inflation is expected to rise 2.0% by 2026.

The Federal Reserve is starting to see some cooling in the labor market, even as it remains tight compared to historic levels. The unemployment rate is expected to rise by 3.8%, down from the June estimate of 4.1%. The unemployment rate is expected to hold steady at 4.5% in 2024 and 2025, unchanged from the previous estimate. For 2026, it is likely to hold within long-term estimates of 4.0%.

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