(Kitco News) - Although U.S. monetary policy has become a secondary factor in the gold market, persistent inflation could create some further selling pressure as it could force the Federal Reserve to raise interest rates again, according to the minutes from the Apri/May Federal Open Market Committee meeting.
In recent days, members of the monetary policy committee have said that while they are not ready to cut interest rates as inflation remains stubbornly elevated, they are also not looking to raise them.
However, the minutes of the meeting show that another rate hike could be a possibility.
“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the minutes said.
The gold market is not reacting significantly to the latest minutes. It is experiencing solid selling pressure as support at $2,400 broke down. June gold futures last traded at $2,390.20 an ounce.
The minutes reflected growing disappointment that consumer prices haven’t made better progress moving back towards the 2% target.
“Participants discussed the risks and uncertainties around the economic outlook. They generally noted their uncertainty about the persistence of inflation and agreed that recent data had not increased their confidence that inflation was moving sustainably toward 2 percent,” the minutes said.
“Participants noted disappointing readings on inflation over the first quarter and indicators pointing to strong economic momentum, and assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2 percent,” the minutes also said.
Although the central bank is not expected to shift its monetary policy stance anytime soon, the committee is looking at other factors that impact market liquidity.
The minutes said that nearly all participants expressed support for the decision to begin to slow the pace of decline of the Federal Reserve’s securities holdings in June by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion, maintaining the monthly redemption cap on agency debt and agency mortgage‑backed securities (MBS) at $35 billion, and reinvesting any principal payments in excess of the $35 billion cap into Treasury securities.
“Some participants commented that slowing the pace of balance sheet runoff would help facilitate a smooth transition from abundant to ample reserve balances by reducing the likelihood that money markets experience undue stress that could require an early end to runoff.
