Gold price directionless as Powell says rate cuts are a 'couple of years out'

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(Kitco News) The gold market was flat as Federal Reserve Chair Jerome Powell explained the central bank's decision to pause, elaborating that markets shouldn't refer to it as a skip but warned that more increases would be appropriate.

"At this meeting, considering how fast and high we moved, we judged a pause was appropriate," Powell told reporters Wednesday. "I shouldn't call it a skip. [It is the idea] of trying to get this right."

Powell also stressed that "nearly all" FOMC participants viewed more rate increases as needed. "The decision to pause was only a decision at today's meeting. July meeting will be a live meeting."

The Fed chair somewhat downplayed the dot plot projections of additional 50-basis-point increases. He drew a line between the pace of rate increases and the ultimate rate level, highlighting that these are separate questions.

"It seemed to us to make sense to moderate our rate hikes as we got closer to our destination. So the decision to consider not hiking at every meeting and ultimately to hold rates steady at this meeting … is a continuation of that process," Powell pointed out. "The main issue that we're focused on now is determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time. So the pace of the increases and the ultimate level of increases are separate variables. Given how far we have come, it may make sense for rates to move higher, but at a more moderate pace."

Rate cuts are two years out

When asked about rate cuts, Powell said the Fed is only likely to look at policy loosening in two years – when inflation comes down significantly.

"It will be appropriate to cut rates at such time as inflation is coming down really significantly, and again, we're talking about a couple years out," Powell said. "Not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate. If you think about it, inflation has not really moved down. We're going to have to keep at it."

Determining the terminal rate

The latest dot plot revealed that the Fed sees rates climbing by at least 50 basis points this year, but Powell added that these projections are unreliable.

"We write down at these meetings what we think the appropriate terminal rate will be at the end of this year," he noted. "It's based on our own individual assessments of what the most likely path of the economy is. It can, in reality, wind up being lower or higher. There's really no way to know."

What is known is that any further rate increases will be "data-driven," Powell added. "I can't tell you that, that I ever have a lot of confidence that we can see where the federal funds rate will be that far in advance."

To read the Fed's June statement and learn more about the latest economic projections and the dot plot, click here.

Gold had a mixed reaction to Powell’s comments, largely trading flat on the day, with August Comex gold futures last at $1,958.60.