The gold market was nervous yesterday. Prices dropped the day before and immediately after the Fed's interest rate announcement. However, the metal got forward momentum.
The Fed's monetary policy meeting took place on Wednesday and was closely watched by markets. Investors waited for the US regulator's decision on interest rates, but it came with no surprises. As predicted, the central bank left the indicator unchanged in a range with a zero bound.
However, the Fed continues to adjust its strategy as it recognizes rising inflationary pressures. Yesterday the regulator announced that it would accelerate its bond purchases to $30bn a month. It intends to complete the process in March, not in June as previously expected.
An accelerated reduction in purchases would allow the Fed to proceed with interest rate hikes more quickly. The central bank is reportedly planning at least 3 hikes in short-term interest rates in 2022, which could push the figure up to 0.9%. This forecast is much higher than the previous one. In September it was suggested that rates would be raised to 0.3% in a single increase next year.
Commenting on the Fed's decision, Naseem Aslam, chief market analyst at Avatrade, said: "Today we have seen the aggressive side of the Fed. Hence, we have seen the gold price falling off the cliff, and the dollar index gained more strength."
The bullion was down by 0.4% or $7.80 to $1,764.50 in yesterday's session. It was the lowest level since early December. The decline occurred even before the results of the Fed talks became known.
Expectations that the regulator will opt for a more aggressive rate did not allow gold to rise, although the metal had a good driver. Yesterday's US retail sales statistics were worse than forecast.
Economists expected the indicator to rise by 0.8% in November. However, it only climbed by 0.3%. This suggests that consumers are cutting back on their purchases amid the fastest inflation in decades.
After the Fed announced its plans for next year, the dollar went into a strong rally and gold prices collapsed. Almost immediately, quotations fell by around 1%, hitting a 2-month low.
Investors believed that tighter monetary policy and higher interest rates could overshadow concerns about rising inflation and the active spread of a new strain of coronavirus. Therefore, the safe-haven asset has temporarily lost its attractiveness.
The situation changed in favour of the precious metal after Fed chief Jerome Powell gave a speech at the final press conference. The Fed's tone was not as hawkish as earlier, when it announced that would double the pace of asset purchase cuts and end the process in early 2022.
Speaking to journalists, J. Powell stressed that the timing of the rate hike depends on fulfilment of conditions for maximum employment in the labour market. The Fed will therefore be keeping a close eye on wages, unemployment, job growth and many other indicators in the near term.
He said that they were disappointed with the level of labour force participation. They realize that it will take a long time to get back to greater participation.
The politician also named a major threat that could prevent peak employment early next year. In his view, a new strain of coronavirus, which is resistant to vaccines, poses a risk.
The chair of the Federal Reserve noted that the US economy was recovering strongly. He also stressed that he did not expect the COVID-19 pandemic to end in the near future.
Despite intensifying concerns about omicron, the central bank expects the unemployment rate to fall to 3.5%, while inflation will exceed the goal of 2% next year.
The Fed now expects inflation to be 2.6% in 2022, compared with a forecast of 2.2% in September. Experts believes that ongoing price increases will boost the value of gold.
After pondering J. Powell's comments, investors changed their minds about the precious metal. On Thursday morning, prices for the safe-haven asset started to rise. US gold futures were up 1% to $1,783.00.
The gold market is reacting to the Fed's fear of inflation and its reluctance to lag behind expectations. At the same time, experts believe that the course taken by the regulator to raise rates more quickly will eventually lead to a recession. Analyst Edward Moya says that gold's downtrend could come to an end in such a case.
