Expect Volatility, Expect Uncertainty, Even With a 98.9% Probability of ¼% Hike

Federal Reserve Faces Uncertainty in Rate Hike Decision Amid Diminishing Inflation

ox·y·mo·ron [ˌäksəˈmôrˌän]
NOUN: A figure of speech in which apparently contradictory terms appear in conjunction (e.g. faith unfaithful kept him falsely true):
“that fashionable rhetorical novelty, the humblebrag, is itself an oxymoron”

If today’s headline seems like it conveys a theme of contradictory terms you are correct. It is almost a certainty that tomorrow the Federal Reserve will announce and implement a ¼% rate hike after taking its first-rate pause since it began a series of aggressive rate hikes in March 2022. Recently Chairman Powell along with other Federal Reserve members expressed the need for two more rate hikes this calendar year.

However, recent data including the most recent CPI data and wholesale data (PPI ) reports collectively confirm that the recent action of the Federal Reserve has had a dramatic effect in reducing inflation. So the question becomes will the Federal Reserve continue its current forward guidance with one more quarter-percent rate hike this year or change its future actions based on positive data confirming that inflation is diminishing and the economy is contracting in the United States?

It is most likely that gold will trade in a narrow and defined range before the announcement of the Fed decision. However, many analysts are already assuming that the Federal Reserve is at the tail end of rate hikes based upon recent data supporting that they are coming closer to their 2% target. If that is the case, it would be highly supportive of gold pricing moving the precious yellow metal higher.

Concurrently, inflation is a global phenomenon and in conjunction with action by the Federal Reserve one must be cognizant of rate hikes by the ECB, Bank of Japan, and other major central banks worldwide. In an environment of global inflation, the Federal Reserve is by far exceedingly important but other central banks are also playing a role as they take steps to reduce inflationary pressures in their respective countries.

The takeaway, therefore, becomes not whether or not the Fed will raise rates by ¼%. But rather whether or not the statement released after the meeting as well as statements made by Chairman Powell at the press conference make any veiled reference that will give market participants insights as to their forward guidance.

It is unlikely that Chairman Powell or the Fed statement will directly address and answer the question as to whether or not the federal reserve is near the end of its rate hike phase, or if they plan more rate hikes this year as well as in 2024. Chairman Powell is a master of walking a tightrope in which he reveals as little as possible and underscores that the Federal Reserve is data dependent, and new data will be the deciding factor in their future actions.

In other words, if tomorrow’s rate hike is the last this year it is highly unlikely that he will clearly state that objective. At the same time, it is highly unlikely that he will give a timeline to the first-rate cuts that contain more than an open-ended and vague response.

This means that regardless of how much the chairman discloses or leaves nebulous there will be a segment of market participants, analysts and economists left unfulfilled with his responses.

Gold Prices Rise Modestly as Dollar Maintains Neutral Stance

You can certainly see that in gold pricing today which is trading higher by a fractional $4.40 taking the most active August contract to $1966.60. Even more so, the dollar is extremely neutral trading off by 0.07% with the index fixed at 101.015.

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Wishing you as always good trading,

Gary S. Wagner