Gold is falling on the US Federal Reserve’s determination to keep interest rates high into 2023

Gold started the trading week on a downside as market participants continue to process and react to last week’s FOMC statement and economic forecasts. Essentially, the Federal Reserve has made it clear that it is committed to reducing inflationary pressures by continuing to hike interest rates and then maintaining those hikes over the next year.

According to Bill Dudley, a former President of the Federal Reserve Bank of New York, the FOMC last week reaffirmed the Fed’s commitment to bring inflation to its target level of 2%.

“The message from policymaking over the past week has been almost entirely hawkish. The Fed’s statement kept the language of “ongoing hikes” and hinted at several more rate hikes. Officials forecast a higher-than-expected prime interest rate of at least 5%. to 5.25% (with more unanimity), prolonged higher inflation, lower output growth and higher unemployment.”

Bill Dudley retired from the Federal Reserve in 2018 and is now a columnist for Bloomberg Opinion and Senior Advisor for Bloomberg Economics. During his tenure, he was not only President of the Federal Reserve Bank of New York, but also Vice Chairman of the Federal Open Market Committee.

In today’s article, he argued that the Federal Reserve does not appear able to change or break the market’s relative optimism about the interest rate outlook. He suggested that this is a false narrative that could cause problems for investors and consumers.

“Despite the Fed’s clear warnings of further tightening, investors don’t get the message. Futures markets are still pointing to a peak overnight rate of less than 5%, about 20 basis points below Fed forecasts, with rate cuts starting next summer.”

In his opinion, the narrative of market participants questioning the Federal Reserve’s resolve is flawed, suggesting there is a flaw in this optimism that could blind the American public and make the Federal Reserve even more aggressive.

“Unfortunately, there is a downside to this optimism: it means the Fed will have to work harder and tighten monetary policy more than it otherwise would in order to reach its 2% inflation target.”

As of 5:30pm EST Gold Futures basis, the most active February 2023 contract is fixed at $1796.80 after factoring in today’s drop of $3.40. Today’s modest declines include some tailwinds resulting from dollar weakness. Currently, the dollar index is down 0.05% and is fixed at 104.28.

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