Gold price climbs to $2,040 on Fed Chair Powell's pause comments

Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here!

(Kitco News) The gold market kept all of its recent gains as Federal Reserve Chair Jerome Powell signaled a potential pause in tightening following another 25-basis-point rate hike.

The Fed’s tenth consecutive increase brought the federal funds rate to a 5-5.25% range – the highest since mid-2007. But the May statement included a "meaningful" change, said Powell, pointing to the decision to take out the reference to "some additional policy firming may be appropriate."

This was a sign markets needed to confirm a potential pause in rate hikes. From now on, the Fed will be driven by a combination of incoming data and credit conditions, Powell said.

"The assessment of the extent to which additional policy firming may be appropriate is going to be an ongoing one, meeting by meeting," Powell said. "We have to balance the risk of not doing enough and not getting inflation under control against the risk of slowing down economic activity too much. And we thought that this rate hike, along with the meaningful change in our policy statement, was the right way to balance that."

The focus for the Fed will be watching what small and medium-sized banks are doing and credit availability.

"We are very focused on, uh, what's happening with credit availability. Particularly, [we are watching] small and medium-sized banks, who are feeling that they need to tighten credit standards and build liquidity. What's going be the macroeconomic effect of that? More broadly, we will continue to very carefully monitor what's going on in the banking system, and we'll factor that assessment into our decisions," Powell said.

Translating the effects of credit tightening into rate hikes is "complicated and adds further uncertainty," Powell noted.

On potential rate cuts, the Fed chair said that inflation is not coming down quickly enough and reversing policy won't be appropriate.

When asked about the banking sector, Powell reiterated that the system remains "sound and resilient" while noting that many banks are now "attending to liquidity issues and taking opportunities to build liquidity."

He added that the resolution of the First Republic collapse draws a line under that period of severe stress. "There were three large banks from the very beginning that were at the heart of the stress. Those have been resolved," he said. "We are very focused on what's happening with credit availability."

The support for another 25bps hike was strong at this meeting, but the committee members did discuss a pause afterward, noted Powell.

"If you add up all the tightening that's going on through various channels, we feel like we are getting closer, or maybe even there," he said. "We've moved a long way fairly quickly. And we can afford to look at the data and make a careful assessment."

With the debt ceiling debate fresh on everyone's minds, Powell stressed that the Fed could not protect the U.S. economy in case of a default.

"No one should assume that the Fed can really protect the economy and the financial system and our reputation globally from the damage that such an event might inflict," he stated.

Gold moved higher in response to Powell's comments, with June Comex gold futures rising to daily highs and last trading at $2,041.10, up 0.88% on the day.