The U.S. Federal Reserve made no changes to monetary policy today as expected. The central bank did, however, increase both its growth and inflation outlooks. The Fed reiterated that interest rates are not going anywhere anytime soon, and that no increases will be seen prior to the end of 2023.
The potential for rates to remain at zero for another couple of years has injected buying interest in the yellow metal today, and gold has now pushed into positive territory following the Fed announcement. Although the Fed has suggested that growth and inflation are likely to pick up more steam, it also cited some key issues that could potentially pit a damper on things going forward. The Fed cited the ongoing viral pandemic as a major contributor to overall economic activity and said that it poses a major risk to the economic outlook.
The rate of inflation forecast by the Fed may now exceed its desired 2% annual target. Recent projections suggest that price pressures could rise by as much as 2.4% by the end of the year before falling back towards 2%. The rapid rise in inflationary pressure could keep gold and other hard assets well supported in the months ahead, despite the potential for strong equity market performance.
The Fed appears ready and willing to follow through on its previously discussed plans to allow inflation to run a bit “hot” before raising rates to slow things down. The notion of ultra-low rates with a weaker dollar and massive stimulus spending may give more investors reason to consider gold in the near future, especially in the face of rising inflation.
Fed Chairman Jerome Powell will be giving a news conference following today’s decision on interest rates. No major surprises are expected, and Powell is likely to continue to telegraph the fact that the economic recovery remains far below the pace necessary for the central bank to consider any changes to policy. Powell may even forcefully argue that any ideas of a rate hike are premature as he looks to lay out the central banks plans and thinking to the investing public.
The U.S. Dollar Index has lost ground after the announcement. The dollar weakening could be a sign of more downside to come. Further dollar weakness could pave the way for sharply higher gold, silver and metals prices. With no rate increases likely being seen unti at least 2024, it is difficult to imagine a scenario in which the dollar strengthens dramatically from recent levels. A downtrend in the dollar could keep upwards pressure on the gold market while providing key support for the yellow metal.
The bears still maintain control of the market on the daily chart. The bulls will likely make a push towards resistance in the $1750 area this week, and a breakout above this area could set the stage for a further rally. The Fed has apparently set the table for higher gold prices in the months ahead. Dinner may now be on the way.