June 5, 2023

Gold has rallied strongly amid mixed signals about future rate hikes

Based on gold futures, the most active December 2022 contract at 5:05 PM EDT is currently flat at $1,662.50, given today’s net gain of $25.70, or 1.57%. That strong gain was based on differences between members of the Federal Reserve who will vote when they debate whether or not to reduce rate hikes at December’s FOMC meeting. There is certainly no consensus on future actions regarding the pace and size at which the Federal Reserve will continue to raise the Fed funds rate.

According to CME’s FedWatch tool, there is a 96.5% chance that the Federal Reserve will raise its key interest rate by another 75 basis points in November. The FedWatch tool’s probabilities are based on the pricing of Fed Funds futures contracts and has had excellent results in past forecasts.

There has been a recent change in the likely rate hike in December, which has changed dramatically over the past week. This indicator currently predicts with a 51.9% probability that the Fed reference rate will be between 425-450 basis points, yesterday the probability was only 24.2%.

At the same time, the FedWatch tool believes that there is a 46.3% chance that the Fed funds rate will be between 450-475 basis points by the end of 2022. This is a big difference from yesterday’s prediction, which indicated a 75.4% probability. What caused the dramatic change in Fed Funds futures pricing over the past 24 hours was fresh speculation from Federal Reserve officials about whether to start tapering interest rate hikes in December and hikes next year.

The Wall Street Journal first reported this morning: “Federal Reserve officials are targeting another rate hike of 0.75 percentage points at their Nov. 1-2 meeting, and will likely then discuss if and how they will announce plans to approve a smaller hike in December.”

The article also discusses the fact that some officials have begun to express “a desire to both slow the rate of hikes soon and stop raising interest rates early next year to see how their moves this year slow the economy.” More concerned among Federal Reserve officials is their desire to reduce the risk of creating an unnecessarily steep economic contraction. Those who oppose changes to their current pace of rate hikes believe it is too early to have these discussions because inflation is still very entrenched and persistent.

Fed Governor Christopher Waller said earlier this month: “We will have a very thoughtful discussion on the pace of tightening at our next meeting.” Which makes it an interesting fact that the Wall Street Journal article carried so much weight today when it was common knowledge that the debate over the pace of monetary tightening was taking place.

All this week, analysts, myself included, have focused on recent statements from several Federal Reserve Bank governors indicating a desire to raise their benchmark interest rate between 450 and 475 basis points before making any decision. This can only happen if they raise rates by 75 basis points at the next two FOMC meetings.

That’s why today’s Wall Street Journal article, “Fed Set to Raise Rates by 0.75 Bps, Talks Size of Future Hikes,” had a huge impact. One possibility is that the Wall Street Journal also reported that “two Federal Reserve officials began making the case for caution in raising interest rates recently.”

Regardless of what caused this article to be published today, it is an indisputable fact that this article helped drive the prices of both gold and silver dramatically higher. It also had a strong impact on US stocks, with the Dow up 748.97 points or 2.47%, the S&P 500 up 2.28% and the NASDAQ Composite up 2.89%.

Since raising the Federal Reserve’s Fed funds rate requires a vote in which a majority of voting members vote in favor of the increase, market participants will be closely focused on the FOMC’s November statement as well as Chairman Powell’s remarks at the press conference following the decision. from the November meeting.

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As always, I wish you good trading and good health,

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect his own Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; However, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not a solicitation to make exchanges in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and/or damage arising from the use of this publication.

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