The Federal Reserve's hawkish stance weighs on gold prices

Gold prices have fallen recently on the back of the Federal Reserve's continued hawkish approach, which leaves the door open for a possible further interest rate hike amid persistent inflationary pressures. These observations come directly from the minutes of the central bank's monetary policy meeting in July.

The minutes offered limited insight into the upcoming monetary decision in September. However, it is clear from the documents that the Committee intends to base its decisions on incoming data. The minutes show a slight inclination towards policy tightening. Participants stressed the need for a restrictive monetary policy to bring inflation back to the Committee's 2% target. In doing so, they point to the ongoing economic uncertainties. The consensus is that future policy decisions should be based on an overall view of all new information and its implications for the economy and inflation.

The gold market in this area

Traditionally, tightening monetary policy has had a negative impact on the price of gold. However, it can be seen that despite the interest rate rises in recent months, gold still held up well against the rise in interest rates. As an example, gold is now trading at €56,000 per kilo, comparable to last year's price when interest rates were sharply lower. 

Focus on inflation and eEconomic outlook

The FOMC minutes show that the Committee's main focus is on inflation. Some members even suggested that interest rates should be raised to bring consumer prices back to the central bank's 2% target. The need for further data on inflation and indications that supply and demand are becoming more balanced were stressed. This is to ensure that inflationary pressures are reduced.

While the economy appears resilient and the labour market remains strong, there are both downside risks to economic activity and upside risks to the unemployment rate. On an interesting note, the central bank is now no longer anticipating a mild recession for this year, but rather below-trend growth in 2024 and 2025.

Internal disagreements and future expectations

Despite the hawkish attitude, the minutes show that there are differences of opinion within the Committee. Some members recommended that interest rates should remain unchanged in July. In addition, there are speculations that the Federal Reserve may be able to raise interest rates one more time in this tightening cycle. With the current restrictive monetary policy, some members see growing risks in both directions to the economy. Emphasis is placed on striking a balance in policy decisions to avoid both unintentional over-tightening and insufficient tightening.

The Federal Reserve's hawkish stance may have implications for gold prices and the broader economic landscape. As the central bank determines its path forward, investors and economists continue to watch it closely. 

 Have a look at us YouTube channel

On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe. 

Source:Kitco

Author: Neils Christensen