Fed A Non-Event?
The conclusion of the latest FOMC policy meeting has now come and gone. As expected, the central bank raised its Fed Funds rate by 25-basis points in what may be viewed as the opening salvo for rate hikes this year. The Fed alluded to possibly hiking rates as many as seven times this year in order to combat rising inflation. The Fed’s statement also cited the ongoing war in Ukraine as a source of higher inflation and traders are now awaiting the press conference to begin with Fed Chairman Jerome Powell.
Stocks are moderately higher following the Fed statement, although they could come under pressure during the press conference today. Today’s reaction to the Fed’s rate hike has been a non-event for the most part. Markets have shown little reaction to the rate hike amid ongoing worries over the Russian/Ukraine war and accelerating inflation. Investor risk appetite is also getting a boost today from reports suggesting that both Ukraine and Russia feel progress is being made in their talks about stopping the war. Of course, time will tell if anything actually comes to fruition. In the meantime, however, the shelling continues.
Chinese officials overnight said they desire further market transparency and want to keep markets running smoothly. These comments fueled a rally in Asian equity markets as China has recently implemented lockdowns related to the spread of Covid-19. The lockdowns have affected global markets, as they may temper demand expectations for certain areas within the globe’s second-largest economy. Chinese lockdowns could, in fact, be playing a role in weaker crude oil and commodity prices.
All things being equal, today’s Fed announcement has not had much effect on markets at all. The central bank did hint at an aggressive turn in its policy stance, however, when it suggested it may need to hike rates seven times this year. With the Fed’s shift in policy expectations came new forecasts for inflation and GDP. Despite an increasingly aggressive Fed, inflation is likely to remain at 4.1% throughout the year. GDP growth has been trimmed from a 4% forecast to just 2.8%. A Fed statement also suggested the Fed would begin trimming its $9 trillion balance sheet “at a coming meeting.” This issue may be addressed further by Powell during the press conference this afternoon.
For the gold bulls, the upside initial target remains the same. The bulls would like to see a close above the $200 level before getting overly excited. The bears are looking for a further decline and a close below the $1900 level as a starting point. A close below this level could attract further sellers while forcing longs to exit the market, possibly exacerbating the selling in the process. The market may not fall too far, however, despite a more aggressive Fed policy stance. The ongoing war and battle against inflation may both keep the yellow metal afloat and could be a primary catalyst for a rally to new all-time highs in the weeks and months ahead.