Inflation and The Fed

Gold May Be On Hold Until Next FOMC Meeting

The gold market is losing some ground on Friday as the trading week comes to a close. The last week was nothing to write home about for gold, as the metal did not do much in either direction. The bulls have given the bears some more operating room, however, as prices have dipped from near the $1800 level. Standing near the $1750 level today, next week could see either camp make a run.

Inflation and The Fed

Inflation and the Federal Reserve’s actions towards it are still fueling marketplace action. Expectations for the next FOMC meeting, next month, are likely to become an increasing market focal point in the weeks ahead. The question is whether the Fed will continue its fight against inflation and hike rates further or if it will throw in the towel.

Following the most recent FOMC meeting, Fed Chairman Jerome Powell suggested the Fed could start to pivot away from the inflation battle. While not saying so, Powell seemingly planted the suggestion within investors’ minds. The question of what the Fed may do has now become more of a discussion topic in recent weeks.

Despite Powell’s potential signal to markets a few weeks back, the Fed may very well continue on its current path and keep raising rates aggressively. Markets are currently pricing in near-even odds of a 50 or 75-point hike next month. Even if the Fed does hike at those levels, what might it say about its plans moving forward?

Fed Unlikely To Pivot?

Despite recent commentary, Jerome Powell may be unlikely to pivot away from the inflation fight. Powell does not want to become known as the second coming of Arthur Burns, the Fed Chair who let inflation run wild on his watch. Knowing the risks that inflation may pose to the long-term health of the economy, Powell may feel it is in the nation’s best interest to endure some short-term suffering for some long-term gain.

                                                                      Source: bloomberg.com

If the Fed does stay on its current path, the central bank would almost certainly put the country into recession, if it is not in one already. The economic costs could be significant, as the recession would likely last at least four quarters. Powell has certainly considered this and may decide to keep going regardless.

Inflation May Be Biggest Risk

The Fed has previously stated that it believes inflation to be the biggest risk to the economy. Allowing inflation to become entrenched would be a worst-case scenario, and the Fed seems willing to do what it can to avoid this pitfall. While a Volcker-era interest level around 20% seems extremely unlikely, the Fed may see itself doing the market a favor by taking rates significantly higher from current levels. Rates are, after all, still very low compared to historical norms.

The markets have a few more weeks of the summer doldrums before volumes begin to return in the second week of September. Gold and other markets may be unlikely to make a sustainable move before then. Shortly after traders return from last-minute summer vacations, the Fed will meet again to discuss rates and policy.

Market May Move After Next Fed Meeting

After the next Fed meeting, the gold market could be ready to move higher or lower depending on what the central bank does and says. If indications are that the Fed will continue its aggressive hiking policy, gold could potentially be weighed down heavily. If the Fed takes a more dovish approach, however, gold could be off to the races.

The key technical levels for gold remain unchanged. The bulls need to produce a close above the $1800 level while the bears need a close below $1700. Whichever side sees a close above or below first may be the side of the market that prevails into the fall.