Gold price holds above $1,850 as Fed minutes reveal worry about ‘misperception’ and ‘unwarranted’ easing

(Kitco News) The gold market was able to hold on to some of its daily gains following the release of the Federal Reserve’s December meeting minutes, with prices trading above $1,850 an ounce.

At the December meeting, Fed officials confirmed their commitment to reducing inflation and warned against “unwarranted” easing of financial conditions.

Minutes of the meeting also revealed that officials were concerned about any “misperception” in financial markets about their actions.

“Participants noted that, because monetary policy operated significantly through financial markets, an unwarranted easing of financial conditions, particularly if driven by a public misunderstanding of the committee’s response function, would complicate the committee’s efforts to to restore price stability,” the minutes state. of the December 13-14 Federal Open Market Committee meeting.

During its last meeting of the year, the Fed slowed to a 50 basis point hike, but remained very firm on its target of reducing inflation to 2%. Fed Chairman Jerome Powell also warned markets that rates are not at a sufficiently restrictive level and will have to stay higher for longer.

In the minutes, officials noted that a slower pace of rate hikes does not mean an easing of financial conditions.

“A number of participants noted that it would be important to clearly communicate that a slowdown in the pace of rate increases was not an indication of any weakening of the Committee’s determination to achieve its price stability objective or a judgment that inflation was already at a continuous level, downward path”, the minutes say.

Fed Chairman Jerome Powell told reporters after the FOMC meeting in December that the longer the US central bank has to keep rates higher, the narrower the runway becomes for a soft cut. “I don’t think anybody knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep recession or not, it’s just not known,” Powell said.

The latest average forecast for 2023 shows that rates could go as high as 5.1%, with the Fed also looking for real GDP to reach 0.5% in 2023 and PCE inflation to slow to 3.1% in 2023.

The minutes revealed that officials recognize the “significant progress” made after raising rates by 425 basis points in 2022 and worry about the potential risk of too much tightening.

“The cumulative lagged effect of policy tightening may end up being more restrictive than is necessary to bring inflation down to 2 percent and lead to an unnecessary reduction in economic activity, potentially placing the greatest burden on the wealthiest groups. vulnerable population,” the minutes say. “Most participants emphasized the need to maintain flexibility and optionality when moving the policy to a more restrictive stance.”

Another highlight was the minutes stating that “none of the participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”

Fed officials also aligned themselves with Powell’s overall message, noting that a tight policy stance would need to be maintained for “some time.”

Following the release of the Fed meeting minutes, gold was largely unchanged, with February Comex gold futures last trading at $1,856.70 an ounce, up 0.57% on the day. Earlier in the session, gold hit a six-month high of $1,871.30, but has since pared those gains.

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