Gold Prices Hold $1,200 As Fed Raises Rates; Leaves Forward Guidance Relatively Unchanged
(Kitco News)- Thegold market is seeing little reaction to the Federal Reserve as it tries to keepa steady hand at the till as long-term interest rates remain relatively unchanged.
Wednesday, in awidely expected move, the Federal Reserve raised interest rates by 25 basispoints, bringing the federal funds rate to a range between 2.00% and 2.25%. U.S.interest rates are at their highest level in nearly a decade.
The central bank wasalso optimistic on the U.S. economy, reiterating that “economicactivity has been rising at a strong rate."
However, the gold market is expectedto react to the Federal Reserve’s guidance on future interest rates. The medianaverage of the central bank’s updated projections - also referred to as the“dot plots” - calls for long-term interest rates to rise to 3.00% up from June’s forecast of 2.9%.
Gold was under modest selling pressure ahead of the data and is seeing only modest buying in initial reaction. December gold futures last traded at $1,203.50 an ounce, down 0.13% on the day.
Federal Reserve's economic projections:
The FederalReserve is more optimistic on growth to the end of the year. The central banksees U.S. gross domestic product to grow by 3.1% in 2018, up from June'sforecast of 2.8%. Economic activity is projected to expand 2.5% in 2019, up atick from June's forecast of 2.4%. Expectations for growth in 2020 remainedunchanged at 2.0%. In its first look at 2021 the central bank expects theeconomy to grow 1.8%.
The committeesees the unemployment rate moving slightly higher this year. The media forecastsexpect the unemployment rate to come in at 3.7% this year, up slightly fromJune's projection of 3.6%. The rate is estimated to fall 3.5% next year,through to 2020, unchanged from June. The unemployment rate is expected to tickup to 3.7% by 2021.
Negative for goldthough is that the central bank also forecasts tame inflation pressuresthroughout the year. With higher interest rates, this means that real interestrates will push higher. The projections show inflation rising 2.1% for thisyear and then falling to 2.0% next year before pushing back to 2.1% in 2020 and2021.
Core inflation, which strips out volatile food and energy prices, is expected toreach 2.0%, unchanged from June's projections. Inflation for the next threeyears is expected to remain at 2.1%, unchanged from the previous forecast.
Andrew Grantham, senior economist at CIBC World Markets, said thatthe statement held little surprises for investors. However, he added thatmarkets appear to be keying on the fact that the fed could start to be a littlecautious as monetary policy pushes closer to 3%.
“Even though the messaging regarding longer term prospects forinterest rates seems a little mixed, markets appear to be paying more attentionto the dropping of policy remaining accommodative, seeing the US$ and bondyields fall slightly,” he said.
By Neils ChristensenFor Kitco News
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