What Does A Fed Hike Mean For Gold?

December 16, 2015
federal reserveToday is judgment day for markets as the Fed decides on interest rates for the last time this year. What can we expect for the gold market?
 
The Fed is expected to raise interest rates for the first time in a decade. Since the 25-basis point hike is already factored into the price of gold, such a move will not affect the gold market. On the contrary, if the Fed fails to increase interest rates, the markets will be surprised and the price of gold will rise.
 
However, the FOMC meeting is not just about raising interest rates. Investors could also expect statements about the state of the economy and clues on the future pace of tightening. The announcement on monetary policy will be associated with the Summary of Economic Projections and a press conference by the Janet Yellen.
 
Thus, the impact of the FOMC meeting on the gold market will depend not only on a decision to hike or not, but also on the size of the increase (less than 25 basis points should be supportive for the price of gold, more than 25 basis points would be negative for the sentiment toward the yellow metal) and the telegraphed path of future hikes. If the Fed officials significantly lower their paths for the federal funds rate compared with the projections made in September (as we expect), gold may gain (and vice versa). The median FOMC members’ projections in September implied four rate hikes over the course of 2016, while traders currently expect the U.S. central bank to raise interest rates three times at best.
 
To sum up, today is a big day for financial markets as the Fed may increase interest rates for the first time in a decade. However, the hike was clearly telegraphed to the markets, so it is widely expected and already factored into the prices. Thus, the impact of the FOMC meeting on the gold market will depend mainly on the message sent by the Fed officials regarding the path of future hikes. Given the stubbornly low inflation, rather weak recent economic data and a threat of loss of independence, the U.S. central bank is likely to lower its path for the federal funds rate, which, if strong enough, would be positive for the gold market.
 
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Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor

Arkadiusz Sieroń is the author of Sunshine Profits’ monthly gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.

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