All eyes were on the FOMC yesterday as they met for the final time in 2023. In the weeks running up to the meeting Fed officials stuck to the brief of sounding flexible when it came to questions asked about the direction of rates. For the last few months, FOMC members have repeatedly been asked if they have finally reached the ‘terminal’ rate after a long and onerous task of trying to take down inflation.
Well, it seems they now all feel they have reached it, as Fed Chair Jay Powell said yesterday that the current rate of 5.5% is “likely at or near its peak for this tightening cycle”.
17 of the 19 members indicated that they expect rates to be lower by the end of 2024. A cut of up to 0.75% across multiple meetings is expected. Markets are pricing in a near 60% chance that the first of those cuts will come in March 2024.
In response to the FOMC announcement, gold climbed over 1% and silver by 2.5%, global stocks also soared whilst bonds fell. Markets will also be looking out for announcements from both the Bank of England and European Central Banks, later today.
Are we there yet?
For what has felt like months, traders have been keen to know if the FOMC is finished with their rate hikes. It was expected that this was the peak of rates as inflation and other economic indicators increased convictions that the FOMC had arrived at where they felt they needed to be.
However, while there is still officially inflation in the economy, is now the right time to entertain the idea of upcoming rate cuts? One could argue that the Fed will now have made its inflation fight even harder as looser conditions could see a further wave of unbridled spending and borrowing from businesses and consumers, thus starting the whole cycle again.
Of course, we all know that the current fight on inflation isn’t really fighting inflation. It’s more like a small battle in a very long, drawn out and damaging war. The Fed may well have brought down headline inflation, but they are yet to confront the real firepower that is sticky core inflation brought about by years of QE and low rates.
More to come…
The FOMC isn’t the only one tidying things up before the end of the year. Both the Bank of England’s MPC and the European Central Bank are set to hold their respective rate setting meetings.
The Bank Of England is fighting a battle against a very stubborn inflation issue. Few expect them to start cutting rates as soon as their peers do. Currently there is little evidence that the economy is ready for rates to be cut.
The ECB meanwhile is seeing some progress, with inflation at a two-year low. Investors expect to see rate cuts coming soon.
Policy by stealth?
So if (the majority) of major central banks are feeling punchy about their inflation victory what does this mean for gold? As we’ve seen this year, gold has become less sensitive to rate hikes, instead choosing to play its own tune. Whilst it did react to the FOMC news last night, it has been holding its own throughout the year. We will watch with some interest to see how it will respond to monetary policy in 2024. Of course, low rates are traditionally good for gold, but this year the inverse has been the case. We think we are starting to see a slight decoupling of the long-term relationship between rates and the price of gold, watch this space.
As we head to the new year it is worth noting one of the major trends of 2023 – central bank gold buying. For many gold bugs there will come a day when gold is central to the international monetary system. For decades the bulk of goldbugs have suggested this will come about as a result of a collapse in the US dollar i.e. the global monetary system.
Instead what we are starting to see is a change in the international monetary system by stealth, rather than by policy. We’re talking about the increase in gold reserves by a number of central banks. Central bankers have been net buyers of gold for some time now, without feeling the need to make any announcements.
Changes in the geopolitical state of play has clearly prompted central bankers (as well as individuals) to question the status quo when it comes to managing their international finances. As a result, they’re turning to the ultimate insurance – physical gold.
With very little set to improve in the coming years, whether it is money supply, the MIddle East, the Russia-Ukraine war and even climate change, we think 2024 will prove to be another pivotal one for gold, with or without monetary policy announcements.
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