Fed Slows Down Hiking. Will Gold Price Accelerate Now?

The FOMC decelerated the pace of rate hikes from 75 to 50 basis points. Is it time to accelerate gold purchases?

The last FOMC meeting in 2022 is already behind us! The key change in the December monetary policy decision is that the Fed hiked the interest rates “only” by 50 basis points and not by 75 basis points as it was doing before. It means that the target range for the federal funds rate was increased to 4.25-4.50%. The softer move was in line with the market expectations, especially after recent softer inflation data.

In other respects, the report remained virtually unchanged. The only modification is about the part about Russia’s war against Ukraine: instead of “creating additional” upward pressure on inflation, it is now “contributing to” it. Given the markets’ adjustment to this negative shock and softer inflation, such a change is perfectly understandable, no revolution here.

Softer Inflation Implies More Dovish Fed

The December FOMC meeting also gave us a fresh dot-plot. The Committee members’ forecasts of the interest rates in 2023 are much more hawkish than in September. They see the federal funds rate at 5.1% next year, compared to 4.6% painted previously. That’s bad news for the gold bulls.

On the other hand, it implies that the Fed will hike interest rates only two times in 2023: one by 50 basis points and one by 25 basis points (or three times by 25 basis points, but I see this as a less likely scenario). Hence, the end of the current Fed’s tightening cycle is near!

Moreover, the FOMC participants see interest rate cuts within their forecast horizon. They expect the federal funds rate to decline to 4.1% in 2024 and 3.1% in 2025. I wouldn’t attach too much importance to these numbers, but one thing is clear: the U.S. central bank will move the federal funds rate up to its peak and then will start to cut it again. Given that a recession is upcoming, it’s not surprising.

Implications for Gold

What does it all mean for the gold market? Well, the December monetary policy statement is without any surprises. The FOMC decelerates the pace of the tightening cycle, but it increased the level of projected terminal rate, in line with the previous remarks of Powell and his colleagues.

From the fundamental perspective, higher interest rates are negative for gold prices. This is perhaps why the initial reaction of gold prices to the monetary policy statement was bearish. However, the decline was quickly reversed. I believe that the upward moves are already priced in. And gold seems to smell the upcoming U-turn in the Fed’s stance. This is why its price has rallied recently, as the chart below shows.

The new dot-plot is hawkish, but it’s not clear whether the FOMC members really believe in their projections or if they just try to manage the market expectations and reverse the recent easing in the financial markets. I believe in the latter option. Anyway, as we have reached the peak in the Fed’s aggressiveness, it might be a good time to buy some gold.

Arkadiusz Sieron, PhD