Gold prices drop into negative territory as the Federal Reserve sees a terminal rate above 4.5% in 2023

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(Kitco News) – The gold market is under pressure to fall below the long-term critical support at $ 1,675 an ounce as the Federal Reserve hikes the Fed Funds rate by another 75 basis points and signals that more aggressive rate hikes will continue until at the end of the year.

The rate hike was widely expected as the US central bank made it clear that its current priority is to slow the economy to cool persistent inflationary pressures.

Looking beyond today’s monetary policy decision, economists’ updated forecasts show that the central bank will see significantly higher rates through 2024. The Federal Reserve’s interest rate projections, also known as a dot plot, see the Fed Funds rate rise to 4.4% by the end of this year, up from the previous estimate of 3.4%.

Looking ahead to 2023, the Fed Funds rate is expected to rise to 4.6%, compared to June’s estimate of 3.8%. Interest rates for 2024 are expected to reach 3.9% compared to June’s projection of 3.4%. In the first look into 2025, the Fed sees interest rates rising 2.9%, which is slightly above the expected long-term rate of 2.5%.

Adam Button, chief currency strategist noted that a terminal rate of 4.6% is much higher than the markets previously expected, looking for a peak of around 4%. He added that the hawkish bias to the projections has pushed the US dollar to a new 20-year high.

Despite a good start to the day, the gold market was unable to withstand the constant selling pressure prior to the US central bank’s monetary policy decision. December gold futures were last trading at $ 1,668 an ounce, down 0.18% from the day.

Coupled with further tightening of monetary policy, the central bank’s updated economic projections show higher inflationary pressures and lower growth through 2024.

The US central bank now sees the US economy grow 0.2% this year, down from the June forecast of 1.7%. US GDP is expected to reach 1.2% in 2023 compared to the previous estimate of 1.7%. Economic growth was also downgraded to 1.7% for 2024, compared to the previous estimate of 1.9%. For 2025, the central bank sees GDP grow by 1.8%.

At the same time, inflation expectations continue to rise. The US central bank sees core inflation, which excludes volatility in food and energy prices, up 4.5% this year from June’s estimate of 4.3%. Core inflation will remain high, 3.1% in 2023 compared to the previous forecast of 2.7%. Looking ahead to 2024, core consumer prices are expected to rise 2.3%, unchanged from the June forecast. Core inflation is expected to moderate to 2.1% by 20254.

Overall consumer prices are expected to rise by 5.4% this year, compared with June’s forecast of 5.2%. Next year, headline inflation is expected to rise 2.8%, up from the previous estimate of 2.6%. By 2024, inflation is expected to rise by 2.3%, one tick more than the last forecast of 2.2%. Consumer prices are expected to increase by 2.1% in 2025.

The Federal Reserve continues to see a fairly stable labor market over the next three years, with the unemployment rate rising to 3.8% this year, compared to June’s projection of 3.7%. The unemployment rate is expected to rise and remain at 4.4% in 2023 and 2024, compared to previous estimates of 3.9 and 4.1% respectively. or 3.5%. For 2025, the unemployment rate is expected to rise by 4.3%.

“Projections for interest rates and economic variables show that participants now believe higher rates and near recession will be needed to bring inflation back to a 2% target,” said Andrew Grantham, senior economist. of the CIBC.

Michael Pearce, a senior US economist, noted that the updated projections are solidly hawkish as the central bank sees another 75bp hike and a 50bp hike in November and December.

“The Fed believes it will have to hike rates a bit and see economic growth weaken more than previously thought to bring core inflation back to near 2.0% target over the next two to three years. In turn, the Fed’s continued aggression suggests that we will need to revise our projections for the Fed funds rate above the 4.00-4.25% peak we currently set, which will also increase downside risks for growth, ”Pearce said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee this accuracy. This article is for informational purposes only. It is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article disclaim any liability for loss and / or damage resulting from the use of this publication.

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