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(Kitco News) - (Kitco News) - The gold market is struggling to hold the line after the Federal Reserve leaves interest rates unchanged. However, it is maintaining its tightening bias as it remains optimistic about the U.S. economy this year.
As expected, the Federal Reserve kept interest rates within a range between 5.00% and 5.25%. Although inflation has come down significantly from last year's 40-year high, the central bank warned investors that it remains a risk.
"Recent indicators suggest that economic activity has continued to expand at a modest pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated," the central bank said in its monetary policy statement. "The Committee remains highly attentive to inflation risks."
While the central bank has held the line on interest rates in June, the Committee signaled that it expects to raise interest rates possibly two more times this year. The Committee also signaled modest rate cuts in 2024.
"Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, 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.
The latest economic projections, also known as the "dot plot," indicates that the central bank sees the Fed Funds rate rising to 5.6% by the end of this year, up from March's projection of 4.1%.
The Fed Funds rate is expected to be 4.6% by the end of 2024, up from March's forecast of 4.1%. Interest rates are expected to remain elevated at 3.4% in 2025, up from the previous estimate of 3.1%.
In initial reaction, the gold market has managed to hold neutral ground. August gold futures last traded at $1,857.40 an ounce, relatively unchanged on the day.
Although gold prices are strugling to attract new bullish mometum, one market strategist said that short-term weakness could be a buying opportunity. Naeem Aslam, chief investment officer of Zaye Capital Markets, said that the Federal Reserve is playing it safe with its latest statement as it looks to end its tightening cycle.
"The pause is here, and it is pretty much clear that the Fed wants to sit on the beach for the summer and let their hard labour do all the work," he said. "The reason that the market is moving lower is that the Fed has indicated that more rates will come, but the fact is that if they really were unhappy with the inflation reading, we would have seen a reaction in terms of an interest rate hike. It is likely that once the dust is fully settled, this equity market will begin to roar again, and we expect the dollar index to move lower, which means the current weakness in the gold price could be an opportunity."
Updated economic projections
Along with keeping interest rates on hold, the central bank has turned optimistic about economic growth. The Federal Reserve sees the U.S. economy growing 1% this year, up from March's forecast of 0.4%. Meanwhile, the central bank slightly downgraded next year's forecast, seeing GDP growing 1.1%, down from the previous estimate of 1.2%. Economic growth for 2025 was downgraded to 1.8%, compared to the prior estimate of 1.9%.
At the same time, inflation pressures are expected to remain stubbornly above the central bank's 2% target. The Federal Reserve sees core inflation, which strips out volatile food and energy prices, rising 3.9% this year compared to March's estimate of 3.6%. Core inflation will remain elevated, rising 2.6% in 2024, unchanged from the previous estimate. By 2025 core inflation is forecasted to rise 2.2%, up a tick from March's estimate of 2.1%.
Overall, consumer prices are expected to rise 3.2% this year, down slightly from the March estimate of 3.3%. By 2024 inflation is expected to rise 2.5% and 2.1% by 2025, unchanged from March.
The Federal Reserve is looking for more resilience in the labor market, with the unemployment rate rising to 4.1% this year, down from the March projection of 4.5%. The unemployment rate is expected to hold steady at 4.5% in 2025 and 2025, down from the previous estimate of 4.6%.
