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(Kitco News) - The gold market continues to hold well above $1,900 an ounce, seeing some new bullish momentum as the Federal Reserve raises interest rates by 25 basis points and signals that it has not finished its tightening cycle.
"The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, 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 in its monetary policy statement.
The central bank's move to increase the federal funds rate to between 4.75% and 5.00% caps a highly unstable period for bond markets and interest rates. Fixed income markets have been extremely volatile in the last few weeks, with a sharp drop in bond yields as investors reacted to the collapse of Silicon Valley Bank in California, New York-based Signature Bank and one of Europe's largest banks, Swiss-based Credit Suisse.
The Federal Reserve downplayed the recent turmoil in the banking sector. While the banking crisis has added a new element to the Federal Reserve's monetary policy stance, it remains focused on bringing inflation down to its 2% target.
"The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.
Although the Federal Reserve said it is not done raising interest rates just yet, the latest economic projections, also known as the "dot plot," indicate that the central bank is nearly finished. The updated projections show the central bank expects interest rates to peak at 5.1% this year, unchanged from December's forecast of 5.1%.
The gold market is seeing some solid buying momentum in reaction to the Federal Reserve monetary policy decision. April gold futures last traded at $1,965.80 an ounce, up more than 1% on the day.
Ole Hansen, head of commodity strategy at Saxo Bank described the Fed's move as a dovish hike, which is supporting gold prices.
Mohamed El-Erain, chief economic adviser at Allianz SE, also highlighted the dovish tone in the Federal Reserev's statement
.#Fed hiked by 25 bps and
Slightly weakened wording on future hikes
Acknowledged the possibility of tighter credit conditions
Kept end 2023 rate level and slightly increased next year's
Revised up #inflation for this year.
Markets like this while waiting for the press conference— Mohamed A. El-Erian (@elerianm) March 22, 2023
Some anlaysts have said that although the Federal Reserve continues to tighten its monetary policy, the gold market is focused on the growing recession threat due to the aggressive tightening cycle.
The U.S. central bank has only slightly adjusted other economic forecasts, seeing slightly weaker growth this year and higher inflation this year.
The U.S. central bank now sees the U.S. economy growing 0.4%, down slightly from December's forecast of 0.5%. The central bank significantly downgraded next year's forecast, seeing GDP growing 1.2%, down from the previous estimate of 1.6% this year. The economy is expected to grow 1.9% in 2025, up slightly from the last estimate of 1.8%.
At the same time, inflation pressures continue to rise. The U.S. central bank sees core inflation, which strips out volatile food and energy prices, rising 3.6% this year compared to December's estimate of 3.5%. In 2024, core consumer prices are expected to rise 2.6%, up from the prior estimate of 2.5%. By 2025 core inflation is forecasted to rise 2.1%, unchanged from December.
Overall, consumer prices are expected to rise 3.3% this year, up from December's forecast of 3.1%. By 2024 inflation is expected to rise by 2.6%, up from the last forecast of 2.5%. In 2025, consumer prices are projected to increase by 2.1%, unchanged from the previous estimate.
The Federal Reserve sees a relatively stable labor market in the next two years, with the unemployment rate rising to 4.5% this year, down from December's projection of 4.6%. The unemployment rate is expected to hold steady at 4.6% in 2024 and 2025.
