Gold price rises after Federal Reserve interest rate hike

Gold prices hit their highest level of the week on Thursday after the Federal Reserve raised interest rates for the second time in three months. The central bank raised interest rates by 25 basis points, as expected, to a range of 0.75% to 1%.

It is clear from the minutes It appears that the central bank is still holding out on future interest rate hikes. Despite further growth in the US economy and the fall in unemployment , the Federal Reserve still sees a number of uncertain factors, such as the impact of the new US administration's fiscal stimulus policy.

Raising interest rates

Commenting on the interest rate decision, Fed Chair Yellen said that waiting too long to reverse the accommodative monetary policy of recent years could result in inflation getting out of hand. In that case, the Federal Reserve would have to raise interest rates too quickly, which could significantly disrupt financial markets. By raising interest rates in small steps, the central bank hopes to prevent this negative scenario.

The central bank expects to raise interest rates to around 1.4% by the end of this year, so that they can be raised further to 2.1% next year. By the end of 2019, interest rates should be back to a level of 3%, which is still quite low from a historical perspective.

Rising interest rates should, in theory, be unfavorable for the gold price, but due to the high debt burdens and rising inflation, investors still see enough reason to buy gold. As long as real  interest rates are negative, the precious metal remains an interesting safe haven.

In the meantime, the Federal Reserve will continue to roll over its portfolio of government bonds and mortgage loans, which means that it will use the proceeds of repaid loans to buy new debt securities. This money tap will not be turned off for the time being, from which we can conclude that the economic recovery is not very strong after all .

Federal Reserve's balance sheet does not shrink

Gold price rises

With the last two rate hikes, we saw the Gold price fall in the run-up to the interest rate decision, only to rise again after the increase has actually been announced. Gold also took a step back in the run-up to this rate hike, as the price fell to its lowest level since January. The gold price now seems to have found its way back up , so this pattern may repeat itself again.

Gold price rises after Fed rate hike (Chart via Bloomberg)