Fed hikes its key interest rate
In a much-awaited announcement, the FOMC (Federal Open Market Committee) raised the federal funds rate 0.25% to 0.75%–1% on March 15, 2017. This is the first increase this year and the second increase in the last three months.
The markets had almost fully anticipated the hike after receiving clear signals from Fed officials. The US inflation and employment numbers were particularly supportive of the rate hike, so the market participants welcomed the news. Most US indexes reacted calmly and ended on positive notes.
Not very hawkish
The markets had already weakened in the anticipation that the Fed might signal a faster pace of tightening. The Fed, however, projected only two more hikes in 2017. It also signaled that further rate hikes would be gradual.
During the post-hike press conference on March 15, 2017, Janet Yellen, chair of the Federal Reserve, noted that the central bank doesn’t share the optimism of stock market (SPY) (SPX) investors and business executives.
Investors should note that the US equity markets have been on a high after Donald Trump’s presidential win in November. Please read What the Euphoric Equity Markets Suggest about Gold for more on this topic.
The Fed and gold
Gold usually takes a hit from higher interest rates for two primary reasons. Gold’s non-yield-bearing nature helps alternative assets generate income. The strength of the US dollar affects hits commodities, including gold, that are pegged to it.
Because gold had already priced in the hike and a much tighter policy going forward, a relatively dovish commentary was soothing to gold prices. Gold ETFs rose after the hike decision came out, and the SPDR Gold Shares ETF (GLD) rose 1.9%.
This exuberance was also reflected in the miners’ stock prices and ETFs. The VanEck Vectors Gold Miners ETF (GDX) soared 7.7% while the VanEck Vectors Junior Gold Miners ETF (GDXJ) rose 11.5%. Among the miners, Harmony Gold (HMY), Iamgold (IAG), Yamana Gold (AUY), and First Majestic Silver (AG) rose 11.2%, 14.5%, 9.5%, and 9.7%, respectively.
For more on the outlook for gold prices, please read A Gold Investor’s Guide to the Potential Rate Hike in 2017.
A higher interest rate scenario could be negative for gold as well as miners. In this series, we’ll see which stocks could underperform or outperform in such a scenario.