Gold price gains as Fed Chair Powell talks disinflation but warns it’s too early to declare victory

(Kitco News) Gold market reacts positively to Federal Reserve Chairman Jerome Powell saying a disinflationary process is underway, but it’s too early to declare victory I warn you.

The Federal Reserve raised another 25 basis points on Wednesday, adding that “continued increases in the target range would be appropriate” to bring inflation down to the 2% target.

“Today’s action has raised interest rates by 4.5 percentage points. [in this tightening cycle that began last year]Powell told reporters at a press conference following the Fed’s announcement.

But the market was more focused on the “disinflation” comments Powell shared. “It’s nice to see the disinflationary process underway,” he said. “For the first time we can say that the process of disinflation has begun and so far it is showing in prices,” he said.

Powell confirmed that the Fed expects commodity prices to start falling at the end of 2021. Supply chains and shortages and demand for services are returning.

But despite this progress, Chairman Powell cautioned against declaring victory over inflation just yet. Or it turns out in 12 months and it’s very difficult to manage the risk of inflation coming back and having to go back.And now you’re really worried about expectations becoming unfixed. he said.

The Fed doesn’t want to tighten too much, but it has the tools to deal with it.

Areas where the Fed wants more disinflation are the housing and core services sectors.

“For housing services, we expect the measured inflation rate to continue to rise for several months, but then decline,” Powell said. We hope to see the process, but we haven’t seen it yet.”

The Fed’s job won’t be done until it starts to settle, Powell pointed out.

Looking ahead, Powell said he expected inflation to drop to 2% without a major recession or a large rise in unemployment. Powell also ruled out a rate cut this year.

“That’s my base case,” he said. “My forecast is … slower growth, some softening in labor market conditions, and a steady decline in inflation, but not rapidly. It is not appropriate to relax the policy this year.”

Gold prices soared during Chairman Powell’s press conference April Gold Futures Last traded at $1,966.70, up $21.40 on the day.

The precious metals space benefited from Powell’s somewhat dovish remarks at the press conference.

“Chairman Powell was optimistic about the disinflationary process and not concerned about the recent easing in financial conditions,” said Edward Moya, senior market analyst at OANDA. “Chairman Powell was quite dovish as he failed to convince the market that the December dot plot could continue to occur. I added, but no one seems to believe it.”