(Kitco News) - Gold prices still have a path higher even if Federal Reserve Chair Jerome Powell sends hawkish messages to the markets in his much-anticipated speech Friday during the annual central bank symposium at Jackson Hole, according to one market strategist.
In an interview with Kitco News, Kristina Hooper, chief investment strategist at Invesco, said that there is no reason why investors should not expect Powell to signal that the central bank will maintain its aggressive monetary policy stance.
"The Federal Reserve has been successful in managing inflation expectations, so there is no reason to change the formula now," she said. "We're going to hear very, very hawkish rhetoric from Jay Powell."
However, Hooper reiterated that "talk is cheap," and a hawkish stance in August doesn't preclude the central bank from pivoting on interest rates at the next monetary policy decision on Sept. 21.
"The next meeting is a lifetime away. We will get a lot of data between now and then and it's clear that the Fed is already impacting aggregate demand," she said.
There is significant uncertainty surrounding the U.S. central bank's next move. Markets see a 50/50 chance the Federal Reserve raises the Fed Funds rate by either 50 or 75 basis points. Hooper said that she expects the central bank to raise interest rates by 50 basis points, which would signal a pivot in its monetary policy stance.
According to the CME FedWatch Tool, markets see interest rates potentially ending the year between 3.75% and 4.00%. However, Hooper added that she sees interest rates rising to only 3% or even lower by year-end.
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"Right now, the Fed is focused on inflation, but there are long-term issues that they will eventually have to address," she said.
One significant long-term issue is the government's growing debt and deficit. Wednesday, President Joe Biden announced a student loan forgiveness program. The government would forgive up to $10,000 in federal student loans for borrowers with incomes under $125,000. At the same time, the government will cancel up to $20,000 for recipients of Pell Grants.
According to estimates from the National Taxpayers Union, the loan forgiveness program could cost the government more than $329 billion over ten years.
"The government clearly has challenges with high levels of debt, but that's going, that's going to be a long-term problem. The immediate issue is inflation," Hooper said.
With the central bank expected to start a slow pivot in September, Hooper said gold's current price could be an attractive entry point.
The gold market has struggled to hold on to critical support levels as the Federal Reserve has raised interest rates by 2.50% this year.
Although interest rates will continue to increase, at least for now, Hooper said there are other reasons for investors to hold some precious metals.
"Inflation remains high; the U.S. economy continues to slow and Russia's war with Ukraine is not ending anytime soon. There is so much uncertainty out there that holding some gold makes sense," she said.
Although gold's price action has been disappointing through most of the year, Hooper said that investors should look past the short-term price action and focus on the long-term potential.
She added that the most compelling reason to hold gold is for diversification.
"Most investors do not have enough exposure to alternative assets in their portfolio. And gold is a unique alternative," she said.
