Powell Volatility: Gold Price Falls as Fed Chairman Says ‘Ultimate Level’ for Rates Will Be Higher Than Expected

(Kitco News) Gold lost all of its gains after the Fed’s statement as Chairman Jerome Powell signaled that the “ultimate level” of interest rates is likely to be higher than previously thought. He also said the window for a soft landing had “narrowed”.

The precious metal quickly fell during Powell’s press conference, which followed the Fed’s decision to raise rates by 75 basis points for the fourth consecutive time. The latest hike means that the Fed has already raised rates by 375 basis points since March, bringing the key rate to a range between 3.75% and 4%.

After hitting a daily high of $1,673.10 immediately after the announcement, December Comex gold futures then fell to $1,639.70 as Powell spoke to reporters on Wednesday.

Powell said that while a slowdown in rate hikes could occur in December or February, the US central bank is likely to take rates higher than previously thought. “At some point … it will become appropriate to slow the pace of increases as we approach the level of interest rates that will be restrictive enough to bring inflation back to our 2% target,” he said. . “We still have a ways to go. And the data received since our last meeting suggests that the ultimate level of interest rates will be higher than expected.”

Powell also acknowledged that the window for a soft landing has “narrowed” as monetary policy has become tighter this year. “The inflation picture has become increasingly difficult over the course of this year,” he said. “It means we have to have a more restrictive policy, and it narrows the path to a soft landing.”

The Fed Chairman’s statements come after a positive reaction from gold to a potential slowdown in rate hikes. In its interest rate decision, the Fed announced that from now on, the US central bank would take into account “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and the inflation, and economic and financial developments”.

This was a departure from previous statements, where the Fed had not placed as much emphasis on the lag effects of monetary policy tightening.

At the press conference, Powell hinted that rate hikes might now be less aggressive. According to him, the crucial question is not how fast but how high to raise the policy rate and how long to keep it at a high level.

“At some point, it will become appropriate to slow the pace of increases. That time is coming, and it could come as early as the next meeting or the one after that. No decision has been made,” Powell said. “To be clear, let me repeat, the question of when to moderate the pace of increases is now much less important than the question of how far to raise rates and how long to maintain tight monetary policy.”

Powell also added that he doesn’t think the Fed has tightened too much. And even if it did, that would be easier to fix than not enough rate hikes. “If we’ve overtightened, we have…our tools… [to] support economic activity. On the other hand, if you are wrong in the other direction… then the risk is that [inflation] became ingrained in people’s thinking,” he explained.

Another hawkish point was that it was still premature to think about a pause in rate hikes, with the December meeting set to reveal how far the Fed could raise rates.