(Kitco News) - The gold market is trading at session highs as Federal Reserve Chair Jerome Powell signals that the central bank is ready to start easing interest rates.
In his much-anticipated speech at the Jackson Hole Central Bank Symposium, Powell said that the upside risk to inflation has diminished and risks to the labor market have grown.
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said in his remarks.
The gold market has seen significant buying in initial reaction to Powell’s comments. December gold futures last traded at $2,551.60 an ounce, up more than 1% on the day.
Analysts have described Powell’s comments as “undoubtedly” dovish. However, most of his speech focused on what drove inflation to a 40-year high in 2022 and how it has since come down.
Although rising inflation risks have been subdued, Powell noted that the central bank will continue to monitor economic conditions. He also struck an optimistic tone, suggesting that the central bank can tame inflation while supporting the economy and labor market.
“With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market,” he said. “The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.”
Some analysts note that markets are still trying to front-run the Federal Reserve, even as Powell suggested that the central bank won’t rush the current easing cycle. Markets see more than a 32% chance of a 50-basis point move in September.
Markets are starting to price in 150 basis points of easing this year, with only three meetings left. Some analysts have suggested that the gold market could see some volatility as those aggressive market expectations are pared back.
Stephen Brown, Deputy Chief North America Economist at Capital Economics, said that further weakness in the U.S. labor market could force the Federal Reserve to meet the market’s aggressive expectations.
“If the unemployment rate rises further, then the Fed would likely respond with a 50 bp cut at the September 17th-18th policy meeting,” he said. “There was little to guide us on the path of policy beyond the next meeting, although the dovish tone today suggests that our forecast of 25 bp cuts at each meeting is perhaps the least we can expect.”
