Gold price falls but not out as Federal Reserve begins tightening cycle and lowers growth forecast for 2022 and increases inflation expectations

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Gold price falls but not out as Federal Reserve begins tightening cycle and lowers growth forecast for 2022 and increases inflation expectations


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(Kitco News) – The gold market remains under selling pressure but has pushed past session lows as the Federal Reserve begins a new tightening cycle even as it lowers its growth forecast and raises its inflation outlook.

As expected, the Federal Reserve raised interest rates by 25 basis points, bringing the range between 0.25 and 0.50%.

Gold prices were testing support just above $ 1,900 an ounce and reduced some of its losses in the initial reaction as the US treads a delicate path within a sea of ​​instability created by the war of the United States. Russia with Urkaine.

“Russia’s invasion of Ukraine is causing enormous human and economic hardship. The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create further upward pressure on inflation and weigh on economic activity, “the Federal Reserve said in its statement. monetary policy.

Not only is the Federal Reserve leveling interest rates, it is also planning to reduce its balance sheet “at an upcoming meeting”.

Despite growing uncertainty, the US central bank reports that it continues to move forward with rate hikes amid rising inflation and falling economic growth.

The Federal Reserve’s interest rate projections, also known as dot plots, jumped from their December forecast. The committee sees the Fed funds rate at 1.9% by the end of the year, up from the December projections of 0.9%. The new average rate points to around seven rate hikes this year.

The Federal Reserve sees slightly slower growth this year as the conflict in Eastern Europe increases economic uncertainty. The Federal Reserve sees US gross domestic product grow 2.8% this year, down sharply from 4.0% forecast in December. However, GDP growth is unchanged in 2023 and 2024 at 2.2% and 2.0% respectively.

At the same time, inflationary pressures have risen sharply. The US central bank sees core inflation, which excludes volatility in food and energy prices, up 4.1% this year, compared to December’s estimate of 2.7%. Core inflation will remain high, rising 2.6% in 2023, up from the previous forecast of 2.3%. Looking to 2024, inflation is also above 2.3%, up from the December projection of 2.1%.

Overall consumer prices are projected to rise 4.3% this year, compared with December’s forecast of 2.6%. For next year, headline inflation is expected to rise by 2.7%, up from the previous estimate of 2.3%. for 2024 inflation is expected to rise by 2.3%, up from the previous forecast of 2.1%.

The Federal Reserve sees a fairly stable labor market over the next two years with the unemployment rate stable at 3.5% this year and next, unchanged from the December projections. The unemployment rate is expected to rise to 3.6% in 2024, up from the previous estimate of 3.5%.

Although the Federal Reserve did not raise rates by 50 basis points as expected at the beginning of the year, economists note that the central bank has expressed a strong hawkish stance.

“The Fed has thrown down the gauntlet in the face of a large surge in inflation, winning a widely anticipated and tamed quarter-point rate hike with a much tougher message about what lies ahead,” Avery said. Shenfeld, senior economist at the CIBC.

Shenfeld noted that not only does the Fed see seven rate hikes this year, but they are expected to rise 2.8% by the end of 2023.

Paul Ashworth, the US chief economist, also said the Federal Reserve’s projections are on the side of the hawk.

“The Fed’s new economic projections suggest that officials are particularly concerned about the possibility of core inflation remaining high,” Ashworth said. “Even after the rally in rate expectations over the past few days, the Fed’s own projections are hawkish.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of 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 this accuracy. This article is for informational purposes only. It is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article disclaim any liability for loss and / or damage resulting from the use of this publication.

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