During the March FOMC meeting, the Federal Reserve raised its key Fed funds rates by 25 basis points, marking the first rate hike by the Federal Reserve since 2018. This was the beginning of the Federal Reserve pivoting from an extremely accommodative monetary policy to a policy of monetary tightening. The Federal Reserve would continue to raise rates at each of the three FOMC meetings that followed. In May the Fed raised rates by 50 basis points, 75 basis points in June, and another 75 basis points in July. This took the cost of borrowing capital from virtually zero to 2 ½%.
With inflation rising at the highest pace in 41 years, the Federal Reserve was slow to initiate a series of rate hikes and had for too long been behind the curve. The greatest error made by the Federal Reserve was its assumption that rising levels of inflation were transitory and would naturally dissipate over a relatively short amount of time. The fact that the Federal Reserve was incorrect in its assumption would force them to initiate an extremely aggressive series of rate hikes over a short period of time.
The graph above produced by Statista plots the 12-month inflation rate from January 2020 to July 2022. It clearly shows that by the time the Federal Reserve initiated its first interest rate hike the CPI or headline inflation had already reached 8.5%. More so, it underscores how long the Federal Reserve turned a blind eye to inflation spiraling out of control with consistent and consecutive upticks month after month.
In April of this year following the Federal Reserve’s first-rate hike, inflation had a fractional decline from 8.5% to 8.3%. By the time the Federal Reserve had raised rates three times inflation continued to rise to hit a peak in June of 9.1%, a level not seen in 41 years. The first meaningful decline in inflation occurred last month moving the CPI from 9.1% to 8.5% in July.
Concurrently, the dollar index rose from 99.26 in March to its highest closing value in 20 years yesterday when the dollar index closed at 108.965. This also had a dramatic bearish impact on gold which hit its highest value in March this year trading at $2077 to its lowest value for 2022 on July 21, when gold futures hit a low of $1680.
The chart above is a two-month Japanese candlestick chart of the dollar index. It identifies the last two times the dollar has traded to this value. The first occurrence was in 2000 when the dollar index broke above 109 and traded to a high of approximately 120. The second instance was during the correction that occurred immediately after hitting 120 in 2003.
The chart above is a daily Japanese candlestick chart of gold futures. As of 5:45 PM EDT, the most active December 2022 contract is fixed at $1761.10 after factoring in today’s gain of $12.70 or 0.73%. The dollar index declined by 0.47% today which means that it accounted for roughly half of the gains in gold with the remaining gains directly attributable to market participants bidding the precious yellow metal higher.
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