The Signal Has Now Come
Much has been made of the Fed and its aggressive policy tightening in the last several months. Many investors have wondered when, not if, the Fed would send markets a signal that the aggressive hiking may stop and that a pause or even reversal could be in store. Such a signal may have been provided today by Fed Chairman Jerome Powell.
Speaking in a speech today at the Brookings Institution, Powell suggested that he does not want to overtighten and then be forced to cut rates quickly. While Powell did say he does not want to cut rates quickly, he did also state that the Fed is slowing down and wants to find that right rate before making any major policy decisions. Powell suggested that the slower pace of rate hikes could come as soon as December. The Fed may be increasingly unlikely to raise rates by 75 points again next month and may be far more likely to hike rates by 50 or even 25 points this time around.
Markets have been wondering for months now when the Fed might signal a slowdown in the pace of rate hikes. Acknowledging that the effects of the previous rate hikes may not yet be felt, Powell seems comfortable in taking a wait and see approach. That approach will likely last through the first half of next year, at which time the Fed may reevaluate. If a recession does appear imminent during that time, however, the Fed could change its tune a lot faster.
For the time being, markets will have to be happy with the Fed taking a less aggressive approach to policy. And just because Powell does not want to quickly start cutting rates does not mean that he won’t. Investors will now continue to await that magic day when Powell does start cutting rates. The threat of a rate cut in the months ahead has boosted gold sharply Wednesday.
Powell did not want to leave markets feeling a rate cut will be seen soon. He made mention of how high rates actually get being more important than the pace at which they get there. He also suggested that restoring price stability may require holding rates at a higher level for longer. Powell said the Fed will stay the course until the job is done.
Looking at Powell’s comments really does not shed much new light on what the Fed may do in early 2023. A slowdown in the pace of rate hikes may be just the first of several steps to prepare markets for a rate cut sometime next year or the year after. Powell may not want to risk the Fed’s credibility, and thus may hold rates higher for longer until inflation shows more improvement and eases back towards the Fed’s desired annual target of 2%.
This may put gold on a different path than it was on a few weeks ago, but does not appear likely to send the market sharply higher in short order. The bulls need to take out the $1800 level on a closing basis. If able to do so, the path to higher prices may be cleared for the months ahead.