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

(Kitco News) The gold market reacted positively when Federal Reserve Chairman Jerome Powell said the disinflationary process was underway, but warned it was too early to declare victory.

The Fed raised rates another 25 basis points on Wednesday, adding that “continued increases in the target range will be appropriate” to bring inflation back to the 2% target.

“With today’s action, we have raised 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.

However, markets were more focused on the “disinflation” comments shared by Powell. “It’s gratifying to see the process of disinflation getting under way,” he said. “We can now say, for the first time, that the disinflationary process has begun. And we are really seeing it in the prices of goods so far.”

Powell admitted that the Fed expects commodity prices to start falling at the end of 2021. “We thought this would happen from the very beginning, and now it’s actually happening,” he said. he noted, pointing to improving supply chains and shortages and demand returning to services.

But despite that progress, Powell cautioned against declaring victory over inflation just yet. “It’s very difficult to manage the risk of doing too little and finding out in six or 12 months that we were actually close but we didn’t get the job done, and inflation comes back, and we have to come back. back. And now you’re really concerned that expectations are ingrained,” he said.

The Fed has no desire to overtighten, but there are tools to deal with it.

The areas where the Fed wants to see more disinflation are the housing services sector and the basic services sector.

“With housing services, we expect measured inflation to continue to rise for several months, but then come back down, assuming new leases continue to be weak,” Powell noted. “We expect to see this process of disinflation, hopefully soon, in basic services outside the housing sector. We don’t see it yet.”

Until that starts to fall, the Fed’s job is not done, Powell pointed out.

On the way forward, Powell said he sees inflation dropping back to 2% without a significant economic decline or a sharp rise in the unemployment rate. Additionally, Powell ruled out a rate cut later this year.

“That’s my base case,” he said. “My forecast is…slower growth, some easing of labor market conditions and a steady decline in inflation, but not quickly. If the economy performs broadly in line with these expectations, it will not be appropriate to cut rates this year, ease policy this year.”

Gold prices surged during Powell’s press conference, with April Comes gold futures last trading at $1,966.70, up $21.40 on the day .

The precious metals space benefited as Powell sounded slightly dovish at the press conference.

“Powell expressed optimism about the disinflation process and did not show concern about the recent easing in financial conditions,” said Edward Moya, senior market analyst at OANDA. “Powell has been rather dovish as he failed to convince the markets that the December dot charts could still happen. Powell added that they don’t see a rate cut this year, but it looks like no one don’t believe it.”