Recent comments from the more hawkish faction of the Federal Reserve have raised serious concerns that current monetary policy aimed at curbing inflation is about to undergo an undesirable change. Several Federal Reserve officials have indicated that they will reintroduce larger rate hikes at their upcoming FOMC meetings. After seven consecutive rate hikes in 2022, the Fed raised rates by just ¼% at the first FOMC meeting of the year. Until recently, there was a 90% chance that the Federal Reserve would make another ¼% rate hike at its next meeting in March.
Meanwhile, according to the CME’s FedWatch tool, the probability of a ½% hike has increased to 18.1%. Exactly a week ago, the CME’s FedWatch tool indicated that the probability of a ½% rate hike in March was 4.2%. Market sentiment has changed dramatically as it is believed that the Federal Reserve’s monetary policy is on the verge of an extremely restrictive revision.
Yesterday Loretta Mester, Chair of the Cleveland Federal Reserve, said: “She wished the Federal Reserve had been more aggressive at its last Interest Committee meeting in January.” Their message was clear: “We need to do more to ensure inflation is on that path back to our 2% target.”
She’s not the only Federal Reserve official who shares this belief. Regional Fed Presidents James Bullard and Loretta Mester spoke to reporters after speaking to a Jackson, Tennessee business group in which they endorsed a 50 basis point rate hike at next month’s central bank meeting.
Advocates of tighter Federal Reserve monetary policy cite recent inflation reports that suggest inflation is much more stubborn than they had anticipated and is not coming down as quickly as their forecasts.
This dramatic turn by Federal Reserve members has created weakness in both gold and silver price formation. Gold futures have been down for the past three straight weeks. Traders had unrealistically hoped for a Fed pivot. However, recent economic data has prompted extremely dovish rhetoric from Federal Reserve members and renewed expectations of upcoming rate hikes in 2023.
As of 4:28pm EST on a gold futures basis, the most active April contract is currently down $0.20 and fixed at $1851.60. The Federal Reserve’s hawkish rhetoric has taken gold off its high of $1974 three weeks ago and traded to a fresh three-week low of $1827 today.
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