Gold Price Falls as Fed Hikes Rates by Another 75 Basis Points
The US Federal Reserve hiked interest rates by 75 basis points on Wednesday (September 21).
The move from the Fed brings the target federal funds rate to a range of 3 to 3.25 percent, its highest since 2008. The federal funds rate is the rate that commercial banks use to borrow and lend their excess reserves to each other overnight.
The news came out of the Fed’s latest meeting, which ran from Tuesday (September 20) to Wednesday. Although a 75 basis point increase was widely expected, some market watchers also thought a full percentage point was in the cards.
The gold price has been trading between about US$1,660 and US$1,675 per ounce this week, well below its peak for the year, which was above the US$2,000 mark. Although the yellow metal is widely viewed as a hedge against inflation, it does not fare well when interest rates are on the rise and has also had to contend with a strong US dollar.
In the immediate aftermath of the Fed’s rate hike, gold dropped even further — it was sitting at US$1,656.69 as of 11:05 a.m. EDT, but within half an hour had rebounded to the US$1,665 level.
How much has the Fed hiked rates in 2022?
The Fed has now raised interest rates by 3 percentage points in 2022.
The American central bank has been consistently increasing rates since its March boost of 25 basis points, with its June hike of 75 basis points clocking in as its largest since 1994.
|___FOMC meeting date___||___Rate hike in basis points___||___Target federal funds rate___|
|January 25 to 26||N/A||0 to 0.25 percent|
|March 15 to 16||+25||0.25 to 0.5 percent|
|May 3 to 4||+50||0.75 to 1 percent|
|June 14 to 15||+75||1.5 to 1.75 percent|
|July 26 to 27||+75||2.25 to 2.5 percent|
|September 20 to 21||+75||3 to 3.25 percent|
The increases have come as the Fed works to fight inflation, which has remained hot in 2022.
The latest consumer price index (CPI) reading came in above expectations, and shows that in August inflation rose 0.1 percent month-on-month and 8.3 percent year-on-year. While the year-on-year number was a deceleration compared to the prior month, the month-on-month rise came after the CPI was flat from June to July.
What will the Fed do next?
Two more Fed meetings are scheduled for 2022, and market participants will be closely watching these events. The first will run from November 1 to 2, and the second will take place from December 13 to 14.
It’s too soon to know what exactly the Fed will do at these remaining meetings, but its Wednesday statement gives some clues — in it, the central bank says that it “anticipates that ongoing increases in the target range will be appropriate,” adding that it is “strongly committed” to bringing inflation back to its objective of 2 percent.
Speaking at a press conference after the meeting, Chair Jerome Powell reiterated those ideas, commenting that the Fed “will keep at it until the job is done.” However, he stopped short of projecting what will happen in November and December, saying that the Fed is taking a meeting-by-meeting approach to rate increases.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
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