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The gold market is seeing some moderate gains in early afternoon trade Friday. This morning, markets got the latest release of CPI, which showed a rise of 6.8%. The report noted this was the largest 12-month increase seen since 1982, and inflation at a 30-month high is certainly giving investors something to think about.

With inflation continuing to pose a problem, the Fed may be forced to act sooner than expected. The central bank has already laid out its plans to taper its monthly asset purchases and Chairman Jerome Powell has already laid the groundwork for the Fed to taper at a faster pace than previously thought. Today’s CPI reading could, however, also give the Fed reason to hike rates faster than expected. Some analysts now believe the Fed could be on track to raise interest rates by June.

The threat of an increasingly aggressive Federal Reserve and higher interest rates has given the markets the creeps for months now. Markets like low rates and free money, and anything that could stop that  will be seen as a major threat. The notion of rising rates and a more aggressive Fed could keep investors on their toes and may even threaten the stock market rally. It has been widely discussed, for years now, that equity markets may be rising not due to corporate profits or future earnings, but due to an easy Fed and extremely dovish monetary policies. It seems now that the next several months could be very telling, and will either prove that to be the case or show otherwise. As market fears over the potential for higher rates take hold,. Volatility is likely to take off and stocks could see some significant selling pressure. This could keep interest in gold and other hard assets elevated and could lead to a significant run higher for the yellow metal.

In addition to rising inflationary pressures, markets are also watching the new Covid-19 variant. The variant has the potential to cause a global economic shutdown once again, and could lead to significantly slower economic activity. Either way, the variant is likely to fuel shipping bottlenecks and could be a major factor behind further supply chain issues. If that is the case, it comes at a very challenging time, when shipping and global supply chains are already under major stress. These issues could keep the price of goods and services elevated for the foreseeable future and are likely to feed into the current inflation narrative.

Despite what the Fed may or may not do, it seems the central bank is already well behind the inflation curve. The Fed will need to be very careful as it could risk a major economic slowdown by raising rates. If the Fed is overly aggressive, higher rates have the potential to send the economy into recession.

The next several months are likely going to feature increasing volatility and the potential for a major stock reversal. These issues could keep gold in its recent trading range and may even force the metal higher.