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Will Gold Surge as the Fed Says to Wait and See?

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The Fed’s December meeting

The Federal Reserve Committee plans to meet for the last time in 2018 on December 18–19. The committee is widely expected to raise interest rates (TLT) by 25 basis points, marking the fourth hike this year. The federal funds rate is currently at 2%–2.25%. The October sell-off in markets was, in part, triggered by the Fed chair’s insistence on continuous rate hikes. While rates are currently lower historically, expectations that they’re poised to go up several times over the coming quarters are deterring new investment.

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Change in the Fed chair’s tone

Until the beginning of October, Fed Chair Jerome Powell was quite hawkish, insisting that “we’re a long way from neutral.” His tone, however, changed in November during a speech at the Economic Club of New York. He said interest rates “remain just below the broad range of estimates of the level that would be neutral for the economy.” This comment came off as dovish to market participants. Over the past few years, one of the factors fueling US equity markets (SPY)(QQQ) has been cheap money. The end of easy money could put the brakes on the economy, which was one of the main concerns worrying markets.

Dovish stance expected

As we saw in one of the previous parts of this series, the latest US jobs data came in below the market’s expectations. This letdown should support the dovish stance from the Fed. As inflation pressures (TIP) remain low, the Fed could rule out aggressive tightening. Moreover, as we discussed in Could the Yield Curve’s Inversion Mean a Recession?, the Fed’s rate hike in December could invert the yield curve. The Fed has maintained that its future decisions will depend on market data. However, the yield curve flattening and inversion could reduce the chance of rate hikes.

A slower-than-expected rise in rates—either due to slowing growth or other geopolitical concerns—could benefit gold (GLD) (IAU). Check out Why a Fed Policy Mistake Is Worrying Markets for more.

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