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(Kitco News) – The Federal Reserve has charted a clear tightening path, and gold prices are now free to climb to new highs above $2,000 an ounce as inflation remains a clear threat to consumers, according to one market strategist.
In a telephone interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said Wednesday’s monetary policy decision was a bit more hawkish than he expected; however, he added that this is a much more dovish forecast than the market one.
As expected, the Federal Reserve raised interest rates by 25 basis points. At the same time, he signaled that he might start cutting his balance sheet at the next meeting. The central bank also updated its economic forecasts, downgrading its growth forecast and raising inflation expectations for 2022. Finally, the central bank also sees the potential for seven rate hikes this year.
While this may sound aggressive, Milling-Stanley said it is not enough to scare the gold market.
“If the Federal Reserve does carry out its plan, then by the end of the year the interest rate will be set at 1.75%,” he said. “Interest rates will remain below 2% this year. I don’t think the markets have anything to worry about.”
Milling-Stanley said the gold market is reacting as he expected. He added that now that the Fed’s plan is laid out, investors can focus on the growing threat of inflation.
In December, the Milling-Stanley team at State Street Global Advisors forecast that gold prices through 2022 would hover between $1,800 and $2,000 an ounce. It looks like his bullish argument that gold will trade between $2,000 and $2,200 is becoming more and more of a reality.
“Now that we have the reality of first-class numbers and we know what’s in store for us in the next nine months, we will now be paying more attention to inflation numbers. That should probably be the focus,” he said.
Last week, the US consumer price index showed that annual inflation rose by 7.9% in February, hitting a new 40-year high. Milling-Stanley added that growing signs indicate that inflation will remain high for the rest of the year.
He added that he expects wage growth in the face of rising commodity prices to keep inflation high for longer than the US central bank expects. While the Fed is forecasting inflation to rise above 4% this year, it forecasts a much smaller 2.6% growth in 2023.
“I think that inflation matters much more than just supply disruptions,” he said.
While inflation could still pick up, Milling-Stanley said the Fed would keep its cautious plan to keep recession threats under control.
“With CPI at 7.9%, [Federal Reserve Chair Jerome] Powell had to do something. But he will remain cautious when it comes to fulfilling his dual mandate,” he said. “The Federal Reserve can only move gradually.”
While inflation will remain high, Milling-Stanley said he does not see conditions like the 1970s when it spiraled out of control, forcing the U.S. central bank under Paul Volcker to cut rates to nearly 20%.
“We had inflation built into the system in the sixties and seventies for most of the 20-year period, which is enough to have inflation expectations firmly rooted,” he said. “Volcker has dealt with inflation at 16%, 17%, 18% a year. In the UK, we’ve had inflation at 25% a year for three consecutive years. We are far from these levels.”
Along with the growing inflationary threat, Milling-Stanley said the drop in global growth forecasts due to Russia’s invasion of Ukraine will continue to support speculative investment demand for gold.
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