What Might The Fed Do?

Monthly Market Preview: Will September See Gold Move After The Fed Meets?

The gold market has been relatively quiet in recent months. Moving primarily sideways, gold prices have oscillated between $1,700 and $1,800 for weeks now. That trend may change this month, however, as the next FOMC meeting is set to take place later in the month.

What Might The Fed Do?

The Fed and questions about what it may or may not do have been a central catalyst for market price action in recent months. For a time, many seemed to believe the Fed could start to pivot away from its battle against inflation. While this did not necessarily mean the Fed would begin to loosen policy again, it did mean that the Fed may hike rates far less aggressively or even take a pause from rate hikes altogether.

Recent commentary from Fed Chief Jerome Powell seems to suggest otherwise. Powell recently gave a speech at the conclusion of the Fed Symposium in Jackson Hole, Wyoming. He suggested the Fed would stay in the fight against inflation and that it viewed inflation as the greatest risk to the economy.

If the Fed is determined to bet inflation to its desired level of 2% annually, how will it get there? Recent aggressive hikes from the Fed have slowed the economy but thus far have not shown to be very effective against price pressures. The Fed is extremely unlikely to take rates where they may need to go to slow inflation (20% or so?) so how does it plan on accomplishing its goal?

Key Questions That Need Answering

That is the question that will need an answer in the months ahead. Some data have recently shown that inflation could potentially have already peaked. If that trend continues, the Fed may find itself in good shape. If, on the other hand, the data stream shows inflation remaining near a 40-year high, the Fed could be in trouble.

Markets are currently betting on a large rate hike this month. The odds are pretty evenly split between a 50-point hike and a 75-point hike. If the Fed hikes less than 50-points, it could send a dovish message to the markets. if the Fed hikes more than 75-points, it could send a hawkish tone through markets.

How Will The Fed Proceed?

Once this month’s FOMC meeting is over and done with, the Fed will have to figure out how it wants to proceed going forward. There is currently little to no reason for the Fed to stop hiking or reverse course and begin easing. Markets have tolerated higher rates so far, although the market’s tolerance of higher rates could start to wear thin in the coming months.

 

Source: Bloomberg.com

That is what could be the true test for the Fed and its inflation battle. How might the Fed handle markets moving significantly lower? If markets were to really crater, surely there would be increasing pressure on the central bank to halt its rate hikes or even start undoing them. If the Fed elects to stand fast at that point, it will preserve what little credibility it may have left.

If the Fed elects to give into that pressure, however, it may not only ruin its reputation but may also put the economy into an extended period of stagflation. The Fed has backed itself into a corner and now will have to follow through to avoid problems that are even worse.

Volatility May Remain

Whatever the Fed does or does not do, markets may remain jittery for some time. The word “recession” has already been tossed around quite a bit, and if the Fed keeps tightening that term will likely become increasingly popular. The U.S. could even be in a recession already. Whether it is or not, tough times may be ahead for the U.S. and global economies.

That makes right now the ideal time to explore your options for gold ownership.