Gold Prices Rally as Markets Continue to Bet Against the Fed


Gold prices gained 1.14 percent on Wednesday, the most in almost 2 weeks. The yellow metal is on course for a 7th consecutive week of gains, which would be the longest winning streak since the summer of 2020. All eyes were on the Federal Reserve over the past 24 hours, which delivered a 25 basis point rate hike, as expected. That brought benchmark lending rates to 4.50% – 4.75%.

The focus was usually on what could come rather than what occurred. Since the end of last year, markets have been pricing in an increasingly dovish outlook. As a result, the US Dollar and Treasury yields fell as the S&P 500 gained. The Chicago Fed, National Financial Conditions Index, is at its lowest since the Fed started tightening last year – a sign of easing liquidity in markets despite quantitative tightening.

What did Chair Jerome Powell say? He acknowledged that inflation has eased somewhat but that ‘it remains elevated.’ He stressed that the central bank ‘will need to stay restrictive for some time’ and that if the economy performs as expected, policymakers don’t see cuts this year. How did the markets respond?

Despite Powell’s rhetoric, financial markets continued to bet against the central bank. Fed Fund Futures point at 2 rate cuts towards the end of this year. This is because traders added almost half a cut to the 2-year horizon. On the intraday chart below, you can see the US Dollar falling alongside front-end bond yields. Gold rallied, capitalizing as the ‘anti-fiat’ trading instrument.

Powell was questioned about the recent easing in financial conditions, but his answer left more to be desired. He said the focus is “not on near-term moves, but on sustained changes.” All things considered, this continues to leave markets vulnerable to disappointment if a pivot becomes increasingly unlikely. On Friday, the focus remains on economic data and non-farm payrolls.

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