Gold Prices Holding Relatively Steady As Fed Signals Two More Rate Hikes This Year
(Kitco News)- Gold prices are holding steady just below the psychological barrier of $1,300 an ounceafter the Federal Reserve suggested that it will hike interest rates moreaggressively this year and the next as the U.S. economy continues to grow.
Following its two-day monetary policymeeting, the Federal Reserve raised interest rates by 25 basis pointsWednesday, in line with expectations. Ahead of the announcement, markets were pricingin a nearly 100% chance of a rate hike. The federal funds rate is now within a range between 1.75% and 2.00%.
More than today’s rate hike, the goldmarket is reacting to the Federal Reserve’s guidance on future interest rates. The median average of the central bank’s updated forecasts --also referred to as the “dot plots” - called for interest rates to end the yeararound 2.4%, up from March’s projection of 2.1%. The forecasts suggest theFed will raise interest rates two more times this year.
Interest rates areexpected to increase to 3.1% next year, up from the previous estimate of 2.9%.The Fed is looking for interest rates to rise to 3.4% by 2020, unchanged fromthe previous projections.
In another hawkish development, the Fed has also removed its forward guidence in its monetary policy statement. In its statement, the central bank said that "economic activity has been rising at asolid rate."
August gold futures last traded at $1,299.20 an ounce, relatively unchanged on the day.
Recapping the Federal Reserve's economic projections:
Alongwith rising interest rate expectations, the U.S. central bank is also more optimisticon economic growth and further strength in the labor market.
The FederalReserve expects the U.S. gross domestic product to grow by 2.8% in 2018, upfrom March's forecast of 2.7%. Economic activity is projected to expand 2.4% in2019, unchanged from the previous forecast. And the economy is expected togrow 2.0% in 2020, unchanged from the previous estimate.
Thecommittee sees further declines the unemployment. The media forecasts expectthe unemployment rate to drop to 3.6% this year, down from March's projectionof 3.8%. The rate is estimated to fall 3.5% next year, through to 2020, downfrom the previous forecast of 3.6%.
Negativefor gold though is that the central bank also forecasts tame inflation pressuresthroughout year. With higher interest rates, this means that real interestrates will push higher. The projections show inflation rising 2.1% for the nextthree years. Inflation expectations are slightly higher this year compared toMarch's forecast of 1.9%.
Core inflation projection, which strips out volatilefood and energy prices, is expected to tick slightly higher to 2.0% this year,up from March's projection of 1.9%. Inflation for the next two years isexpected to remain at 2.1%, unchanged from the previous forecast.
By Neils ChristensenFor Kitco News
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