On Wednesday (February 22), spot gold rebounded again, and investors are waiting for the minutes of the Federal Reserve’s latest policy meeting to be released at 3:00 Beijing time on Thursday (February 23) to assess its prospects for further interest rate hikes. The Fed is walking a tightrope as it tries to limit economic growth to reduce inflation without slipping into recession.
At 20:27 Beijing time, spot gold rose 0.41% to $1,842.57 an ounce; the main COMEX gold futures contract rose 0.49% to $1,851.5 an ounce; the U.S. dollar index fell 0.04% to 104.162.
Data released on Tuesday (February 21) showed that the US Markit composite PMI unexpectedly rebounded to the highest level in eight months in February, matching the strong performance of previously released inflation, retail sales and employment data, further indicating the strength of the US economy. strong and tight labor market.
Investors shifted their focus to the upcoming minutes of the Federal Reserve meeting, which may detail the case for a 25 basis point rate hike this month. Beyond that, investors will also be looking for guidance on the path of medium and long-term interest rates and inflation forecasts. According to the latest market forecast, the Federal Reserve will not stop raising interest rates in the first half of the year, and the federal funds rate will reach a peak of 5.352% in July.
While inflation appears set to be contained by then, the federal funds rate could remain elevated for longer than earlier expected as a strong U.S. labor market and consumption showing resilience in the economy could both push inflation higher again.
Markets had expected the FOMC to signal a pause in rate hikes after raising rates by 25 basis points in March and May. But strong economic data has forced frequent hawkish comments from Fed officials and complicated the Fed’s outlook.
Cleveland Fed President Loretta Mester previously said there was a compelling case for a 50 basis point rate hike at the February policy meeting. St. Louis Fed President Bullard also said that 50 basis points was also an option for consideration at the February meeting. This prompted the market to ask two questions: 1. How many other Fed policymakers at the last meeting believed there was a compelling case for a 50 basis point hike. 2. How much this may have changed in the past few weeks given the appearance of strong US economic data released recently.
Jan Hatzius, chief economist at Goldman Sachs, said on Tuesday,The Fed will raise interest rates at its March, May and June meetings in response to a stronger economic expansion, “the recent numbers have been stronger than expected in terms of growth and we’ve seen higher inflation.”
Xiao Fu, an analyst at BOCI, said:“Markets are focused on the Fed minutes due later today, but if there are concerns about higher inflation or longer-term inflation, then we could see potentially some headwinds for gold prices.”
The Fed Walks a Tightrope
However, wage inflation lost traction according to the latest U.S. jobs report, which appeared to give some support to the view that the Fed’s tightening cycle has begun to have an impact on the still-strong U.S. labor market.
Although Fed Powell insisted in his post-meeting press conference on February 1 that further interest rate hikes were on the way and that the Fed did not plan to cut rates this year, he failed to forcefully refute direct questions about market expectations for rate cuts this year. So it’s a good thing that the pullback in inflation that we’ve seen so far hasn’t come at the expense of a weaker labor market.
The key takeaway from the press conference was that the Fed seemed confident that peak inflation had been reached, the deflationary process had begun, and that the economy was still in good shape. Powell also didn’t seem concerned about rising stock markets and a general easing of financial conditions.
The Fed is walking a tightrope as it tries to limit economic growth to reduce inflation without slipping into recession. In the minutes of their December meeting, Fed officials agreed that a less hawkish stance on rate hikes was needed, but expressed concern that financial markets could misinterpret this as a weakening of the monetary authority’s commitment to fighting inflation.
Recent comments from Fed officials have also suggested that policymakers are leaning toward further rate hikes. But officials said there was a need for a sensible approach to raising rates without disrupting the job market. Because the impact could ultimately lead to a sharp increase in unemployment, hurting the most vulnerable groups in society.
The minutes of the Fed’s meeting this month are likely to acknowledge the strong performance of stocks in January and the loosening of financial conditions more broadly, but the market does not want the FOMC to explicitly see this as an obstacle to achieving the monetary policy goal of 2% inflation.
On the one hand, some members of the Fed’s policymaking hierarchy may have made the case for a 50 basis point hike. On the other hand, Powell’s tone was less hawkish than in previous meetings, which likely reflects the overall mood of the committee. In particular, the repeated focus on fighting inflation is seen by the market as a sign that the Fed has made enough progress in fighting inflation to stop raising interest rates soon. It’s hard to see the market buying into this inflationary view, even if it was made clear in the minutes.
Omair Sharif, Founder of Inflation Insights says, officials are likely to set a high bar for resuming a single hike of 50 basis points. But if more policymakers support keeping the option of raising rates more aggressively, it could signal that the Fed does not rule out raising rates higher than previously expected to quell strong inflation.
Matt Simpson of City Index said:“Traders will be more sensitive to any hawkish cues from the Fed minutes, which could affect gold prices. For the foreseeable future, gold is more likely to touch $1,800 than it is to touch $1,900.”
Spot gold is expected to fall below $1,828
Looking at the daily line, the price of gold is in the downward trend of wave II since $1960. It is currently hovering around $1828, but it is expected to drop to $1788 in the market outlook. They are the 38.2% Fibonacci retracement of the upward wave I and the 50 % Fibonacci retracement levels. Both wave II and wave I are sub-waves of the upward (V) wave that started at $1615.