The federal reserve is on the verge of starting the most aggressive tightening cycle of 28 years. It is almost guaranteed that the Central Bank increases its interest rates by 50 basis points on Wednesday. Nevertheless, the ongoing question for markets and investors is how hawk the Federal Reserve will be and how it will have an impact on gold prices.
Colin Cieszynski: The Fed is so stuck in the corner behind the curve
Although the markets have almost 100 %chance of a 50 -basin movement on Wednesday, economists and market analysts say there are still many uncertainty about the upcoming decision. There are some expectations that the Central Bank can surprise the markets with a 75 basis point -point move.
Some economists have a chance to 20 %for a more aggressive movement. However, CME’s Fed Watch Tool shows that markets have almost 100 %chance for a 75 basis -point movement in June. Win Thin, President of Brothers Harriman’s global currency strategy strategy, presents that interest rates of markets will rise to approximately 3.25 %by the end of the year.
In addition to the increase in interest rates, the federal reserve also took the balance sheet to reduce $ 95 billion per month. According to some economists, more prominent than the existing aggressive stance of the Fed’s interest rates is the situation of accelerating plans. SIA Wealth Management Chief Market Strategist Colin Cieszynski, in an interview, reminds us that in December five months ago, the interest rates of the markets expect to increase 75 basis points throughout the year and makes the following statement:
The Fed is so far behind the curve that they cornered themselves and hurry to raise their interest rates.
Historically at the beginning of the cycle, gold prices fall
While the precious metals market was better than the stocks, he saw an important volatility with the Federal Reserve preparing the ground for the monetary policy decision on Wednesday. Last month, gold prices fell by about 2 %and prices are expected to remain below $ 2,000.
Kriptokoin.comAs we have included in the news, gold prices fell to the lowest level of 2.5 months with the liquidation of investors’ rise bets before the Federal Reserve decision of the Federal Reserve. While gold struggles, many market analysts noted that the gold points to a long -term low level at the beginning of the US central bank’s tightening cycle.
“Effective Driving Forces for Gold Prices: Risk Appetite and Credit Margins”
Some commodity analysts say that gold continues to be a significant risk and inflation protection because the aggressive position of the Federal Reserve increases the risk of stagflation and even recession. In a recent note, Huw Roberts, the analytical president of Quant Insight, says that gold is the presence of a low -valuable safe port in the current market environment and makes the following assessment:
The effective driving forces of gold are risk appetite and credit margins. The long -term model emphasizes the role of gold’s safe port. Today’s inflation levels eliminate the role of state bonds being an effective port. A world characterized by uncertainty and price pressures makes gold controversially a means of protection protection than US treasures.
According to Sal Guii, the endurance of the economy can be tested
Although many economists do not see the stagnation as the basic scenario, they say that the threat has risen when the Fed begins to tighten the interest rates aggressively. Some economists say that there are similarities between the current tightening cycle and the FED that was so aggressive about 30 years ago. BMO Capital Markets Senior Economist Sal Guatiri thinks that Fed’s monetary policy is the biggest risk for the economy. Economist makes the following comment:
The stagnation is not our main view, but a large number of things that may go wrong, such as permanent high inflation, or even higher interest rates, can be tested the endurance of the economy.
The threat of economic slowdown increased sharply after the US GDP data shrinked by 1.4 %in the first quarter of 2022 and significantly missed expectations in the first quarter of 2022. Many economists did not take into account the disappointing report, and that most of the weakness were due to trade imbalances. However, other economists say that increasing inflation has begun to put pressure on consumption, which will be an obstacle to activity.
Can the Fed be soft landing?
Avery Shenfeld, a senior economist in CIBC, likens the Fed’s difficulties in monetary policy to download a jet to an aircraft carrier. For many economists, inflation will be the key to whether the FED can make a soft landing.
Low inflation will have green light to slow down interest rate hikes at the end of this year or at the end of this year, because at the end of this year or early 2023. Avery Shenfeld says the pilots descending to the aircraft carriers are not at full speed and that’s what the FED had to do to achieve their target after focusing on interest rate hikes in 2022.
“Inflation will remain at a higher level for a while”
InveSCO’s global market strategist Kristina Hooper states that when the inflation is examined, it is less important than the general tendency to choose the summit. A sharp decline in inflation will be the best scenario for the US Federal Bank, but it is not possible to happen. The strategist explains his views as follows:
I expect inflation to remain at a higher level for a while. Considering the ongoing pressures, I expect the US CPI to be over 5 %by the end of the year. This is because the war in Ukraine seriously affects the prices and supply chains.
Hooper adds that high inflation will force the Federal Reserve at least to follow the aggressive path for now. In the next four to six months, Hooper says he believes that he will be desperate to catch up because the FED perceives that he is far behind the curve.
After this first tightening explosion, if the data offers the opportunity to do so, I expect the Fed to be more moderate in interest rate hikes.
