Gold price jumps as Fed Chair Powell talks disinflation but warns it's too early to declare victory

(Kitco News) The gold market is reacting positively to Federal Reserve Chair Jerome Powell saying that the disinflationary process is underway but warned that it is too early to declare victory.

The Fed raised rates by an additional 25 basis points Wednesday, adding that "ongoing increases in the target range will be appropriate" to get inflation down to the 2% goal.

"With today's action, we've raised rates by 4.5 percentage points [in this tightening cycle that began last year]," Powell told reporters at a press conference that followed the Fed announcement.

However, markets were more focused on the "disinflation" comments that Powell shared. "It is gratifying to see the disinflationary process now getting underway," he said. "We can now say, for the first time, that the disinflationary process has started. And we see it really in goods prices so far."

Powell admitted that the Fed expected goods prices to start to come down at the end of 2021. "We've thought this would happen since the very beginning, and now here it is actually happening," he noted, pointing to the improvement in the supply chains and shortages and the demand coming back towards services.

But despite this progress, Powell cautioned against declaring victory on inflation just yet. "It's very difficult to manage the risk of doing too little and finding out in six or 12 months that we actually were close but didn't get the job done, and inflation springs back, and we have to go back in. And now you really do worry about expectations getting unanchored," he said.

The Fed has no desire to overtighten, but there are tools to deal with that.

The areas where the Fed wants to see more disinflation are the housing services sector and the core services sector.

"With housing services, we expect that measured inflation will continue moving up for several months but will then come down, assuming that new leases continue to be soft," Powell noted. "We expect to see that disinflation process, we hope soon, in the core services ex housing sector. We don't see it yet."

Until that starts to come down, the Fed's job won't be complete, Powell pointed out.

On the path forward, Powell said that he sees inflation going back down to 2% without a significant economic decline or a big increase in the unemployment rate. Also, Powell has ruled out a rate cut later this year.

"That is my base case," he said. "My forecast is … slower growth, some softening in labor market conditions, and inflation moving down steadily, but not quickly. If the economy performs broadly in line with those expectations, it will not be appropriate to cut rates this year, to loosen policy this year."

Gold prices surged during Powell’s press conference, with April Comes gold futures last trading at $1,966.70, up $21.40 on the day. 

The precious metals space benefited from Powell sounding slightly dovish during the press conference.

"Powell expressed optimism with the disinflation process and did not show concerns over the recent easing of financial conditions," said OANDA senior market analyst Edward Moya. "Powell was rather dovish as he failed to convince markets that the December dot plots could still happen. Powell added that they don't see a rate cut this year, but it appears no one is believing that."