Gold price digests Fed Chair Powell's mixed messages around disinflation and more rate hikes

(Kitco News) The gold market was volatile after Federal Reserve Chair Jerome Powell reiterated that the "disinflation process" has begun but highlighted that getting inflation down to 2% will take a "significant period of time."

Powell spoke to David Rubenstein, Chairman of the Economic Club of Washington, D.C., Tuesday.

The markets wanted to hear what Powell had to say about the massive job gains the U.S. economy saw in January, and the Fed chair delivered.

"I would say we didn't expect it to be this strong. It shows why we think this will be a process that will take a significant period of time," Powell commented. He also added that it is a good thing that inflation is starting to come down not at the expense of a strong labor market.

Powell stressed that getting inflation down to the Fed's 2% goal will be a "bumpy" ride, and rates would have to remain in a restrictive territory for some time.

A lot of what happens this year depends on the incoming data. And if inflation surprises on the upside, the Fed will be raising rates more than the markets are currently expecting, he pointed out

"We anticipate that ongoing rate increases will be appropriate," Powell said. "We expect significant progress with inflation this year. It is our job to produce it. But the reality is we depend on the data. If we keep getting higher inflation reports, it may well be the case we might have to raise more."

The strong January employment report underscores that the expectations of the road to 2% inflation being quick and painless are wrong. "This is not the base case. We will need to do more rate increases," Powell added. "If the data were to continue to come in stronger than we expect and we conclude we need to raise more, we would do that."

Powell admitted that sometimes he gets to see the macro data the night before the official release. "If data comes out during the FOMC meeting, for example," he clarified.

When forecasting the expected decline in inflation, the Fed chair noted that there would be "significant" drops this year, but for price pressures to fall to 2% won't happen until next year.

Powell concluded that this was the biggest 2023 challenge as disinflation in the service sector is yet to kick in, and that will take time.

On the U.S. debt limit debate, Powell ruled out the trillion-dollar coin idea and said there was only one way to deal with the issue: "Congress raising the debt ceiling in a timely fashion. That's what has to happen. If it doesn't, no one can think the Fed can protect the U.S. economy."

At first, gold prices shot up, with April Comex gold futures rising to the daily high of $1,897.20. However, as soon as Powell discussed the risk of more rate hikes, gold retreated and was last trading at $1,882.20, up 0.14% on the day.