LAWRIE WILLIAMS: Fed blows hot and cold on interest rates, as does gold.
The immediate aftermath of Wednesday’s FOMC meeting was a little hard to take in, which is why we have taken a couple of days before commenting in allowing the dust to settle a little. Market reaction was extreme, to say the least, particularly as far as the gold price was concerned. As strongly expected the meeting outcome was to raise the Federal Funds interest rate another 75 basis points (3/4%) to 3.75-4% - the fourth such rise in a row, and the initial reaction of the gold price was to drive it up to over $1,670 to the delight of the gold bulls. Some decent positive movement at last!
Then Fed chair Jerome Powell opened his mouth in his comments to the media and the adverse impact was both rapid and to the contrary. The gold price dived to a low not seen for comfortably over 2 years, ending the day at around the $1,620 level. The fall was probably overdone, as these things so often are, as was the meteoric rise earlier. To mix one’s metaphors the gold bulls ended the day very much with their tails between their legs after an euphoric earlier boost. On more sober reflection today in European trade, the yellow metal has managed to recover much of its lost ground and is trading back above $1,660 as I write, but how it will fare in U.S. trade is still open to question.
So what did Powell say which caused such an intense turnaround. Although he did point to the Fed looking at easing its rate increases, perhaps even as early as at the December FOMC meeting, he also commented that the ‘ultimate level’ of rate increases was likely to be higher than the markets had previously expected – whatever that might mean. Interestingly the CME’s Fedwatch Tool is still 52.8:47.2 in favour of the likelihood of another 75 basis point increase at the December FOMC meeting, although much could happen to change these odds one way or the other in the 40 days between now and the meeting date.
To some extent the Powell statement may have been designed to try and cool down the recent equity market ardour which had seen the major stock market indexes rise despite all the doom and gloom recession scenario predictions. Probably the last thing the Fed wants ,if it is trying to control spending and reduce inflation, is a sector of the populace feeling wealthier because their investments are increasing in value. Perhaps the seemingly overdone temporary sharp fall in the gold price could thus be construed as collateral damage due to a rising dollar index brought on by higher U.S. interest rates! But the U.S. Treasury will also be hugely worried by the seemingly ever-rising interest rates trend as it makes the servicing of the massive U.S. debt level ever more problematic. So don’t be too surprised to see some measures to bring down U.S. interest rate levels which would be gold positive.