Weekly Market Review: Powell Seen As More Hawkish Than Expected
The most important moments for gold this week have now come and gone. In a speech earlier today, Fed Chairman Jerome Powell struck a surprisingly hawkish tone. He said the central bank will stay with its restrictive policy stance for some time while reiterating the central bank’s goal of bringing inflation back down to the 2% target.
Has Powell Backed The Fed Into A Corner?
Not only did Powell suggest the Fed would keep policy tight for some time, he also warned against the risks of loosening policy prematurely. Powell acknowledged that rising interest rates are slowing growth. He added, however, that those risks are outweighed by inflation.
If the Fed was in a corner before, it is now really in a corner. Seemingly suggesting the Fed will continue to hike rates aggressively, the Fed may now be forced to do exactly that, regardless of the economic consequences. Should the Fed at some point elect to reverse course now, it could lose any remaining credibility it has within the market.
Powell acknowledged the pain that rising rates can cause to households and businesses. He suggested that inflation would be a worse pain, however, and that without price stability the economy does not work for anyone.
source: Bloomberg.com
Powell also acknowledged the slowing effect of previous rate hikes but said he also sees pockets of strength. In other words, more work needs to be done and the Fed is willing to do it.
Powell’s commentary did provide markets with some insights into the Fed’s thinking. They did not, however, provide what the markets were looking for. The lack of forward guidance by Powell may keep investors guessing in the months ahead. The CME FedWatch Tool still shows odds near evenly split for a 50 or 75-basis point hike next month.
What Might The Fed Do After September?
What the Fed does beyond next month may be the bigger question. The Fed could take a slower approach and allow more time to see how its previous hikes affect the economy. It could also take a complete pause and wait to hike further altogether. After Powell’s speech today, however, it seems increasingly unlikely the Fed will consider taking rates down again anytime soon.
Many analysts felt that Powell’s speech did not reveal anything new. No signal was provided for the meeting next month and the Fed will not make a major U-turn next year. Both of these things have already been widely discussed by other Fed officials and there is a lack of anything fresh that investors may use to position themselves for the Fed.
Powell May Have Invited Second-Guessing
As investors are kept second-guessing the Fed and what it may do in the months ahead, markets could see another round of volatility. Stocks have recovered much of the lost ground in recent months, but that is nothing new in a bear market. Stocks will often come roaring back, in fact, and seemingly recover several times before rolling back over and going lower than before.
If markets do encounter increasing volatility, gold and other perceived safe-haven assets could stand to benefit. Although gold has not moved higher in recent months, it has also done a good job of absorbing any selling pressure. Both the bulls and the bears have been unable to sustain movement higher or lower. That trend may be set to conclude and conclude sooner rather than later.
For the time being, gold remains stuck in a range and moving mostly sideways. The key technical levels of $1,700 and $1,800 remain in focus. The bulls have been unable to produce a close above $1,800 and the bears have been unable to produce a close below $1,700.
Given the metal’s lack of volatility and movement in recent weeks, it seems to suggest that whichever side is broken above or below first could dictate price action for months to come. Visit us online today to explore your options and get started!
