The Federal Reserve raised interest rates by another 50 basis points Wednesday afternoon as expected. Now that the rate hike is out of the way, investor attention will turn to the central bank’s dot plot. The Fed said following the hike that it would continue to tighten monetary policy to fight inflation. The Fed statement and projections appear to be more hawkish than markets expected. Markets are now awaiting the press conference with Fed Chief Jerome Powell.
The bearish reaction in both stocks and gold shows how important the Fed projections for rates may be. After some dovish commentary in recent weeks, Powell may look to sound more hawkish today as the Fed tries to set the appropriate expectations for 2023. While Powell did recently state that the Fed would in fact begin to slow the pace of rate hikes, he did also suggest that rates may need to remain higher for longer. Powell may reiterate that notion at today’s press conference.
A hawkish leaning Fed may put a dent into gold’s recent rally. The bulls are holding the market above the key $1800 level, thus far, but the real test may come in the days ahead as markets digest Powell’s commentary today. If the bulls do lose the $1800 level, the bears may regain control of the market quickly and could take prices sharply lower from current levels. A close below the breakout level of $1700 would signal real trouble for the market and could set the stage for a test of as low as $1500 before finding a meaningful bottom.
With the Fed looking to maintain the terminal rate above 5% in 2023, the gold bulls may have some work to do in the months ahead. The Fed’s dot plot now sees the Fed Funds rate rising to 5.1% next year, up from the September projection for a rate of 4.6%. The dot plot also shows rates falling to 3.1% by 2025. The dot plot is in contrast with expectations previous the Fed announcement and some repricing may now need to occur. That could mean selling in stocks and buying on the dollar. The dollar strength seen in recent months has been a major deterrent to higher gold values and it could continue to act as such if its rally does continue.
With the final FOMC meeting now out of the way for 2022, the gold market may see some sideways action until the end of the year. Volumes may begin to dry up rapidly as the holidays approach and could remain light until after the new year has begun. At that time, investors may rethink their positions and stances on policy and the market could see rising volatility and movement. The danger to the gold market at this point is the Fed leaving rates elevated for longer than anticipated. Should it do so, the gold bulls may have a challenging time taking the market higher in 2023. That could lead to an extended period of range-bound price action.