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(Kitco News) – The gold market remains under selling pressure but has pushed back its session lows as the Federal Reserve embarks on a new tightening cycle despite cutting its growth forecasts and raising its inflation forecast.
As expected, the Federal Reserve raised interest rates by 25 basis points, widening the range to 0.25-0.50%.
Gold prices have tested support just above $1,900 an ounce and cut some of their initial losses as the US charts a delicate course in a sea of instability created by Russia’s war with Ukraine.
“The Russian invasion of Ukraine is causing enormous human and economic hardship. The implications for the US economy are highly uncertain, but in the short term, the invasion and related developments are likely to create additional upward pressure on inflation and dampen economic activity,” the Federal Reserve said in a monetary policy statement.
The Federal Reserve is not only raising interest rates, but also plans to cut its balance sheet “at the next meeting.”
Despite the growing uncertainty, the US central bank is signaling that it continues to raise interest rates in the face of rising inflation and slowing economic growth.
The Federal Reserve’s interest rate forecasts, also known as dot charts, have jumped from their December forecast. The committee forecasts a 1.9% federal funds rate by the end of the year, compared with a December forecast of 0.9%. The new media rating points to about seven rate hikes this year.
The Federal Reserve is forecasting slower growth this year as conflict in Eastern Europe heightens economic uncertainty. The Federal Reserve is forecasting 2.8% growth in US gross domestic product this year, compared to 4.0% forecast in December. However, GDP growth will remain unchanged in 2023 and 2024 at 2.2% and 2.0% respectively.
At the same time, inflationary pressures increased sharply. The US central bank forecasts core inflation, which rules out food and energy price volatility, to rise 4.1% this year from a December estimate of 2.7%. Core inflation will remain elevated, rising by 2.6% in 2023 from the previous forecast of 2.3%. Looking ahead to 2024, inflation will also rise to 2.3% compared to the December forecast of 2.1%.
Overall consumer prices are expected to rise 4.3% this year, compared with a December forecast of 2.6%. Headline inflation is expected to rise by 2.7% next year from the previous estimate of 2.3%. Inflation is expected to rise by 2.3% in 2024, compared to the previous forecast of 2.1%.
The Federal Reserve is forecasting a fairly stable job market over the next two years, with the unemployment rate remaining steady at 3.5% this year and next, unchanged from its December forecasts. The unemployment rate is expected to rise to 3.6% in 2024 from the previous estimate of 3.5%.
Although the Federal Reserve did not raise rates by 50 basis points as expected earlier this year, economists note that the central bank has taken a hard hawkish stance.
“The Fed threw down the gauntlet when faced with a broad surge in inflation, combining a widely anticipated and moderate quarter-point rate hike with a much stronger message about what lies ahead,” said Avery Schoenfeld, senior economist at CIBC.
Schoenfeld noted that the Fed will not only see seven rate hikes this year, but is also expected to rise 2.8% by the end of 2023.
Paul Ashworth, chief US economist, also said the Fed’s forecasts are hawkish.
“The Fed’s new economic outlook suggests that officials are particularly concerned that core inflation could remain high,” Ashworth said. “Even with interest rate expectations rising in recent days, the Fed’s own forecasts remain hawkish.”
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