What’s Next For Gold Prices As Traders Price In Probability of Another Fed Rate Hike

Inflation Jitters: A Rollercoaster Ride for Interest Rates

What a difference a month makes. The New Year began with a bout of optimism that the chapter of record-high interest rates was finally coming to a close after Fed Chair Jerome Powell indicated that officials would start winding down rates from a 22-year high.

But now, traders are beginning to question how the Federal Reserve can manage a U.S economy that just won’t land – with some even considering ‘the unthinkable scenario’ of whether interest rates will need to go higher – only weeks after a steady run of reductions appeared all but certain.

The sudden shift in narrative comes after two hotter-than-expected inflation readings this month, fuelled concerns that inflation could re-accelerate, which has sent out a clear message that the Federal Reserve’s fight against inflation isn’t over yet.

Gold Prices Hold Steady Amid Fed Rate Cut Uncertainty

Gold prices are currently holding steady in wait-and-see mode as traders dissect the FOMC Monetary Policy Meeting Minutes released on Wednesday, for clues on the precious metals next big move.

Bets on lower rates coming soon were so prevalent a few weeks ago that Fed Chair Jerome Powell publicly cautioned that policymakers were unlikely to be in position to cut as of March. Less than three weeks later, traders have not only removed March as a possibility but May also looks improbable.

According to GSC Commodity Intelligence – strong economic data, tight labor market conditions and persistently high inflation are just a multitude of factors that makes it very difficult for the Fed to cut interest rates too quickly.

In a note to clients, analysts at GSC Commodity Intelligence signalled that the timing of the first rate cut has been pushed out to June, while pricing in less than four cuts in total for 2024, down from six at the start of the year.

Jerome Powell’s Dilemma: Will the Fed Cut, Hike, or Hold?

In recent days, Former U.S Treasury Secretary Lawrence Summers voiced what a number of the world’s most powerful Wall Street institutions had already been thinking: perhaps the Fed’s next move isn’t a cut at all. Leading to a possible conclusion “that the next move is up”.

Even if another hike is too hard to countenance, some Fed watchers are floating a repeat of the late-1990s: only a brief course of rate reductions that sets the stage for increases later.

Whichever way you look at it, one thing is clear. Jerome Powell and his colleagues at the Federal Reserve now face their biggest dilemma ever.

As always, traders are scrutinizing every word of the minutes for fresh clues into the central banks future monetary policy plans and most importantly, confirmation of whether the Fed will cut, hike or hold interest rates higher for longer.