Bullion dives as FED unwilling to shift off the hawkish path
Jerome Powell lays out intentions to prioritise inflation over all other worries, causing risk assets to fall. Gold prices fell sharply, as Jerome Powell came and went, spooking the market. The $1750 level provides major support and is where we previously bounced.
However, in July, the FOMC raised interest rates by 75 basis points. However, the recession drums are becoming more audible, and gold enjoys such music. Another significant increase in interest rates! The federal funds rate was hiked by 75 basis points to 2.25-2.50 percent by the Fed. It was the second such large rise in a row, resulting in the current tightening cycle being the sharpest in modern history.
The US economy has already entered a technical recession, as defined as a period of two quarters with negative economic growth. According to the Bureau of Economic Analysis, the U.S. GDP dropped 0.9% in Q2, following a 1.6% contraction in Q1. And please remember that the full effect of interest rate hikes hasn’t been felt by the economy yet. Hence, the odds of soft landing have decreased – and Powell admitted it, saying: We know that the path [to soft landing] has clearly narrowed, really based on events that are outside of our control. And it may narrow further.
The only thing that makes the FED feel quite comfortable when tightening its monetary policy stance is that the unemployment rate remains very low. However, the labor market is in worse condition than the unemployment rate suggests. Moreover, the unemployment rate is a lagging indicator. Well, the US economy is going to slow down, but that doesn’t automatically mean that the FED will bring inflation under control.