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Will The Fed Slow Down Their Monetary Tightening?

Daniel Plainview

Updated: October 31, 2022

global growth
Editor’s Note:

EDITOR’S NOTE: This week is a big one for all investors, particularly for those holding gold and silver. The FOMC meeting is scheduled to take place this Tuesday and Wednesday. Will the Fed slow down its hike rates, or are they going to continue hiking rates aggressively as they had been doing over the last few months? What will the next round of PPI, CPI, and PCE readings look like? And if it takes roughly a year for monetary policy to work its way into the economy, are we just now seeing the results of Fed policy made in the last quarter of 2021? Gold and silver are likely to swing this week, so pay close attention to both the FOMC announcement and Friday’s jobs report. Read on to get the big picture of the economic context from a gold investor’s perspective.

Next week is all about monetary policy as gold wraps up Friday under heavy selling pressure. With the fourth 75-basis-point rate hike already priced in for Wednesday, the main question is whether the Federal Reserve will slow down after the November meeting.

A few data points already point to slower growth and a looming recession, with some central banks, including the Bank of Canada, shifting to smaller rate hikes.

"Has the most intense phase of the global monetary tightening cycle passed?" asked Capital Economics senior U.S. economist Michael Pearce. "The Fed is still expected to deliver its fourth 75-bp hike in a row next week, but that increase could come with signals of a moderated pace of tightening ahead. That would follow the Bank of Canada's downshift this week to a 50-bp hike and the perceived dovish tone which accompanied the European Central Bank's 75bp hike on Thursday."

Moving to a slower rate hike pace would be positive for gold, which is why some analysts are getting more bullish on the precious metal.

"The Fed is going to back away from raising so aggressively. There could be talk of a step down at the next meeting," said RJO Futures senior commodities broker Daniel Pavilonis. "Gold hasn't faired too well priced in dollars. If we see the dollar come off, gold can do very well."

The Fed has been very swift with its rate hikes, and it could be ready to "let the pieces fall and see where they land," Pavilonis told Kitco News.

However, not all are convinced that the Fed would be willing to take its foot off the accelerator.

"There are more signs of weakness, and investors are anxious to price that in. But it is not going to be an easy call to downshift. Markets are getting complacent here," said OANDA senior market analyst Edward Moya.

Markets could still get a strong labor market release and a hot November inflation report.

Next week is going to be volatile for gold, Moya told Kitco News. "Despite all catalysts, gold is going to be anchored here for a little while longer. I am hesitant to join the pivot camp just yet. A lot of Fed speakers support a move to 50 bps in December, but I think we are in for a choppy market," he said.

The terminal rate, which signals how high the Fed is willing to raise rates, is also very crucial for markets. And many analysts don't see the U.S. central bank stopping until it reaches 5%.

At the last meeting, the Fed's forecasts showed rates climbing 4.4% this year and 4.6% next year.

After next week's meeting, the Fed would have raised rates by 375 basis points this year, taking the federal funds rate to 3.75%-4%.

"Unfortunately, the data hasn't been moving in the right direction, and we would probably need to see a noticeable slowdown in the month-on-month rates of core CPI increases … to give the Fed the confidence to moderate the pace meaningfully," said ING chief international economist James Knightley. "At this stage, we just aren't confident that this will happen in time for the December FOMC meeting, so there remains the strong possibility that we get a fifth consecutive 75bp hike versus our current 50bp view."

Gold's support levels have dropped from $1,675 to $1,620. And so far, that level held despite a stronger U.S. dollar and higher Treasury yields, said MKS PAMP metals strategist Nicky Shiels.

At the time of writing, December Comex gold futures were trading at $1,644.10, down 0.7% on the week.

"Prices broadly underperformed risk assets throughout October but held up well into month-end given the wealth destruction in Chinese & U.S. tech," Shiels said. "Flows were on aggregate rather neutral (ETF selling offsetting COT short-covering), indicated in prices on track to close down only ~1% MoM."

There is also the Bank of England

The Bank of England also has its rate decision next week, with market expectations varying between a 100-basis-point and a 50-basis-point hike.

"We now think a 50bp rate hike is narrowly more likely than the 75bp Bank of England rate hike markets and most economists appear to be expecting," Knightley said. "The committee is likely to be heavily divided. But in recent speeches, policymakers have been signaling that markets are overestimating the amount of tightening left to come."

Data next week

Tuesday: U.S. ISM manufacturing PMI

Wednesday: U.S. ADP nonfarm employment, Federal Reserve rate decision, Powell press conference

Thursday: Bank of England rate decision, U.S. jobless claims, U.S. ISM non-manufacturing PMI

Friday: U.S. nonfarm payrolls

By Anna Golubova

For Kitco News

Originally published on Kitco News.

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