The worries over inflation have caused the Federal Reserve to take on a much more hawkish approach to monetary policy than originally anticipated. The Fed has already raised rates by 25-basis points and now believes it will have to hike rates another six times for a total of seven rate hikes this year. Not only is the Fed looking to hike a lot of times, but it is also even considering raising rates by 50-basis points rather than 25. If the Fed elects to do so, it would be the first such hike since the early 2000s and it has the potential to slow the economy drastically.
To be clear, higher interest rates do not always or automatically equal recession. The stock market has, however, grown very accustomed to ultra-low interest rates and easy monetary policy. Many analysts believe this policy has been the primary factor for stocks reaching new all-time highs and seemingly trending higher regardless of what has been thrown at the market in over a decade. The easy money party may be coming to an end, however, and some are betting that the end of easy money means the end of easy equity gains.
On Tuesday, Deutsche Bank became the latest investment bank to voice its concerns over the possibility of recession. The bank said that the economy will take a “major hit” during 2023 and 2024 and that the end result of an increasingly hawkish Fed looks recessionary. Deutsche Bank economists suggested that there may be two quarters of negative growth and a more than 1.5% rise in the unemployment rate. These would both be recessionary factors, although they could only point to a moderate recession.
Downside risks remain, however, and could put the U.S. on a much more negative path going forward. A more severe downturn cannot be ruled out, and the threat of such a downturn may change market dynamics for years to come.
Investors will pay close attention to Wednesday’s release of the latest FOMC meeting minutes. They will closely scrutinize the minutes looking for any clues about the potential for a 50-point hike in May. Fed Chairman Jerome Powell has said that the U.S. economy can handle higher rates. That notion may be tested sooner rather than later, however, if the Fed elects to become more aggressive. The CME Fedwatch Tool is currently pricing in a nearly 78% chance of a 50-basis point hike in May. The Fed minutes this week could reinforce that idea or give reason to lower those odds.
For the time being, the gold market may continue to maintain its recent trading range. Any clues derived from the minutes or other Fed commentary could, however, send gold higher or lower, possibly breaking out of the recent range in the process. The bulls will still aim for a close above last week’s highs in the $1967 area while the bears will look to produce a close below $1900 and then $1850.