On Thursday (December 1), spot gold strengthened for the third consecutive trading day, hitting a new high of $1,783.60 an ounce since November 16, as Fed Chairman Powell’s speech strengthened market expectations for a slowdown in the Fed’s interest rate hikes. Pressure on the dollar continued to fall. But the Fed has a long way to go to fight inflation and face a prolonged labor market tightness, which could limit gold’s gains.
At 20:17 Beijing time, spot gold rose 0.77% to $1,781.86 an ounce; the U.S. dollar index fell 0.50% to 105.464.
Overnight, Powell told the Brookings Institution in Washington, effectively confirming that the Fed will slow the pace of rate hikes in December. Markets are now pricing in a more than 80% chance the Fed will lower rates to 50 basis points at its upcoming December meeting. Policymakers will also make new forecasts for interest rates, economic growth, inflation and unemployment in the coming years.
Powell: Time to slow down
Powell said now is the time to slow down the pace of rate hikes. Powell dismissed the notion that the Fed is so focused on quelling the worst inflation in 40 years that policymakers would try to “destroy” the economy. He insisted that a “soft landing” was still possible, with inflation slowing without a sharp rise in unemployment.
Powell said: “We’re not going to … try to crash the economy and then rebuild it. Policymakers want to not tighten too much … because cutting rates is not something we want to do anytime soon. That’s why we’re slowing down , and trying to figure out a way to get to the right level to bring inflation down over time.”
“You can’t raise rates as fast as you’ve done before. That said, investors always like to hear that directly from the chairman,” said Rick Meckler at Cherry Lane Investments in New Jersey.
Investor attention is now turning to the U.S. Labor Department’s non-farm payrolls data due on Friday (December 2). A disappointing ADP employment report released overnight showed that U.S. private sector employers added 127,000 jobs in November, well below expectations and the previous reading, dampening expectations of any positive surprise from non-farm payrolls.
City Index analyst Matt Simpson said:“A strong jobs report would give the Fed the green light to keep raising rates while inflation remains high, which is negative for gold. A weak report could be positive for gold as it points to lower consumer demand going forward, leading to deflation.”
Long way to go
Despite the imminent slowdown in the pace of rate hikes, Powell said there was still an open question “how long do we need to raise rates further to get inflation under control and how long do we need to keep policy at a restrictive level.”
While Powell did not give a forecast for the “final rate” level, he said it would likely be “slightly higher” than the 4.6% policymakers forecast in September. Reining in inflation “will require keeping policy at a restrictive level for some time,” he said, a remark that bucked market expectations that the Fed could start cutting rates next year as the economy slows.
If the Fed raises interest rates by 50 basis points in December as scheduled—the overnight policy rate range is raised to 4.25%-4.50%, and the cumulative rate hike this year is 425 basis points, the Fed will set the fastest rate rise since Volcker took office as chairman. (Note: Volcker served as chairman of the Federal Reserve from 1979 to 1987, during which time U.S. inflation was as high as 13%.)
However, this has yet to have a convincing effect on inflation. The Fed’s preferred measure of inflation – the PCE annual rate – remains at more than 2.5 times the Fed’s 2 percent target. Powell noted that while commodity inflation has been moderating, housing costs are likely to continue rising next year, while key price indicators in services remain high. “We have a long way to go to restore price stability. We will stay the course until the job is done.”
Economists at ING said:The dollar overreacted overnight to comments from Powell, who, while acknowledging a slowdown in the pace of rate hikes, had at the heart of his message that core inflation remained high, especially in core services other than housing. The core PCE inflation data is the biggest driver and they expect the dollar index to find support around 105.00.
long-term change
The U.S. faces a prolonged period of tight labor markets. Powell hinted at a long-term economic adjustment amid persistently high borrowing costs, a slow retreat in inflation and a chronic shortage of workers in the United States. That could portend a prolonged period of higher interest rates and inflation, and a slow response to the Fed’s restrictive policies.
The Fed is grappling with some of the existing and long-standing problems magnified by the new crown pandemic, especially the drag on labor supply caused by an aging population, early retirement of workers and weak immigration.
Powell said those circumstances would not be reversing anytime soon. He acknowledged that easing supply and demand in a tight labor market will be largely balanced by Fed action — either by reducing job vacancies or, as some fear, increasing unemployment.
“I think right now we have to assume that labor supply is not going to bounce back and we have to do everything we can to restore labor market balance and get inflation back to 2% … really just by slowing job growth, not putting people out of work,” Powell said. “
These structural concerns, which have been the backdrop to debates at the Fed since the onset of the pandemic, are now coming into focus. Concerns over global supply chains, for example, initially thought to be short-lived, are likely to pass and help address high inflation. But progress has been slower than expected, and U.S. labor force participation remains subdued.
Strategists at TD Securities said:“Fed Chairman Jerome Powell hinted that the Fed will slow down the pace of rate hikes next month, but that doesn’t mean rates won’t go above 5%. Confirmation of a slower pace of tightening prompted the market to buy gold, though, given that inflation is set to slow down for a while The market continues to plague the market for a period of time, suggesting that the risk of continued policy tightening remains significant. The current gold price action may be the result of last-minute short positions being covered. We still expect gold to move lower in the first quarter of 2023.”
Spot gold looks at $1797
On the daily chart, the price of gold started an upward wave III from $1,725, and the upper resistance looked at the 38.2% target of $1,791 and the 61.8% target of $1,831. Wave III is a sub-wave of the upward (I) wave that started at $1616.
On the hourly chart, the price of gold started an upward ((3)) wave trend from $1,745, and the upper resistance looked at the 138.2% target of $1,789 and the 161.8% target of $1,797. ((3)) is the sub-wave of wave iii.