The markets are sitting tight and awaiting the latest FOMC meeting conclusion and announcement. It is widely expected that the Fed will raise rates by 50-basis points today rather than 25. Some have even suggested the central bank could elect to raise rates by 75-basis points today. Arguments can be made for all levels of a hike. The recent GDP data miss could give the Fed reason to rethink its aggressive stance and could possibly lead to just a 25-point hike. Any variance from a 50-point hike could see some fireworks, however, as investors are forced to rethink their strategies. That being said, given recent trends in the market and gold’s lack of upside on weaker than expected data, the path of least resistance for the metal may be lower.
Markets are calm ahead of this afternoon’s announcement and presser by Fed Chair Jerome Powell. The biggest issue of the decision this afternoon is not how much the Fed will raise rates today, but how aggressive it plans on getting in the months ahead. Inflation is clearly a major problem. The war in Ukraine will only make price pressures even worse and the Covid lockdowns in China may stress already-strained supply chains to the maximum. The Fed’s commentary today could be critical for putting markets at ease and setting the path of expectations going forward. On the other hand, a lack of clarity by the Fed today could put markets into a tizzie as interest rate expectations become unanchored and as the unknowns surrounding monetary policy increase.
Worries over inflation could increase substantially if the Fed does not take an aggressive course of action. Stocks and risk assets, however, could potentially tank if the Fed raises rates quickly and aggressively. The central bank has seemingly backed itself into a corner, however, and will be forced to choose between allowing inflation to get even more out of control or the potential for a bear market in stocks and risk assets. The Fed has recently made it clear that it intends to fight inflation regardless of the consequences. The Fed has been known, however, to change its mind rapidly and pressure from politicians and others once equities really begin to break could prove to be too much for the central bank which could then adjust its thinking. Going only part of the way would likely cause even more harm, however, as inflation would still be problematic while stocks could be lower. This is arguably the worst case scenario the Fed could put itself into at this point.
For the time being, the bears remain in control on the daily chart and the path of least resistance may be lower. The bears will look to produce a close below key support at the $1850 level. The bulls will target a close above resistance first at $1900 and then at $1950. A breach of these levels above or below could set the trend for weeks to come and may determine gold’s direction for the foreseeable