Investing.com – Who Will Win – Ambitious Fed or Inflation Monster?
Uncertainty pushed gold down for a second straight week, posting its biggest weekly percentage drop since November.
Still, pressure on prices and fears of the fallout from the Russia-Ukraine war have added to gold’s dual economic and political hedge, returning it back above the $1,900 support it briefly breached earlier this week.
The most-active gold futures contract on the Comex in New York settled down $13.90, or 0.7%, at $1,929.30 an ounce. For the week, the benchmark gold futures contract fell 2.8%, its biggest drop since the week ended Nov. 19, 2001.
The Federal Reserve this week approved a 25-basis-point rate hike at its March 15-16 meeting, the first hike since the Covid-19 crisis in March 2020. The Fed also warned that it could raise interest rates by another 6 basis points this year based on the number of calendar meetings of its decision-making Federal Open Market Committee (FOMC).
Following Wednesday’s rate decision, Fed Governor Christopher Waller, one of the more hawkish members of the Federal Open Market Committee, said U.S. economic data was “screaming” for a half-percentage-point rate hike over the next few months to curb inflation.
Waller’s comments, along with similarly hawkish messages from other Fed representatives, helped a rally on Friday that devalued currency-denominated commodities, including gold. The dollar has fallen more than 1 percent over the past two sessions as currency traders disappointed with the Federal Reserve’s modest rate hike on Wednesday.
“The dollar is seeing massive inflows, which are short-term troubles for commodities,” said Ed Moya, a European analyst at online trading platform OANDA. “As investors (become) concerned about the impact of the Ukraine war on inflation and ultimately economic growth. The U.S. dollar will benefit from rapidly improving spreads and steady safe-haven flows.”
Federal Reserve Chairman Jerome Powell reiterated after raising interest rates this week that the central bank will be “flexible” as it tries to balance the fastest economic growth in nearly 40 years with inflation, which is also at its fastest pace in 40 years. Crazy speed growth. After contracting 3.5% in 2020, U.S. gross domestic product expanded 5.7% last year, the fastest pace since 1984. Inflation, as measured by the consumer price index (CPI), expanded by 5.8% in 2021, the highest level since 1982.
The Fed has two mandates: target the “maximum” employment of Americans with unemployment at 4 percent or less, and keep inflation at 2 percent or less. Its first target was a resounding success, reducing the unemployment rate to 3.8% in February from a pandemic-and-record 14.8% in April 2020. But the record for its second target was abysmal, with the CPI rising 7.9% in the year to February, even faster than December’s 7.0% increase.
Waller, who has been pushing for tighter monetary policy and greater fiscal discipline to rein in inflation, said the risk of a war in Ukraine led his more dovish colleagues in the FOMC to vote for moderate rate hikes at the March meeting.
But he said he would likely push for a series of 50 basis-point rate hikes at the upcoming Federal Open Market Committee meeting to “preload” a tighter policy that would have a bigger impact on inflation.
“It’s going to be an issue in the next few meetings — about 50,” Waller said, expecting resistance from other FOMC members. “But the data shows we’re headed in that direction. I’m really in favor of raising rates early. (Let’s) do it, not just promise it.”
Most Fed officials expect rates to rise to around 1.9% by the end of 2022 if the Federal Open Market Committee continues to raise rates by 25 basis points at its next six meetings.
Waller did not specify where he wants banks’ interest rates to be by the end of the year. But CNBC said he appears to be targeting 2.0-2.25% based on his push for a mix of 25 and 50 basis point hikes.
In forecasts released at this week’s Federal Open Market Committee meeting, three policymakers expected rates to end the year at 2.375%, while one expected it to close at 2.625%. The most aggressive of these was St. Louis Fed President James Bullard — who also happens to be Waller’s former director — who said rates should be at 3.125% by the end of the year.