Gold remains relatively muted as market participants await the start of the Federal Open Market Committee meeting tomorrow. As of 5:00 PM EDT based on gold futures, the most active December contract is currently trading at $1685 with a net gain of $1.50 today. The December contract opened at $1685.40, trading at a low of $1667.60 and a high of $1688.80.
This contrasts with other precious metals, with palladium futures gaining 5.55%, platinum futures gaining 2.28% and silver gaining 1.03%. All precious metals recorded fractional gains based on dollar weakness. The dollar index is currently pegged at 109.34 after factoring in a 0.15% decline.
Market participants expect the Federal Reserve to announce the latest interest rate hike after this week’s FOMC meeting on Wednesday. Beginning in March this year, the Federal Reserve raised the “federal funds rate” for the first time since 2018 by 25 basis points. They continued to raise rates at the FOMC meetings in May, June and July. The net result was that the Fed took rates from near zero to their current level of 225 to 250 basis points. According to the CME’s FedWatch tool, there is an 82% chance that the Fed will raise rates by 75 basis points on Wednesday. This would be the third interest rate hike of 75 basis points this year.
The Federal Reserve has been laser-focused on bringing inflation down to an acceptable level of around 2%. However, inflation remains extremely high and persistent. The CPI index hit a 41-year high in June at 9.5%. The most recent data revealed that inflation remains extremely high, reaching 8.3% in August.
Most of the decline in inflation is directly attributable to lower energy costs, with the gasoline index falling 7.7% in July. However, inflation for other basic necessities continues to be high. Take-home food prices rose 13.5% for the year ending August.
According to the BLS, “During this period, food-at-home prices increased 13.5%, the largest 12-month percentage increase since the period ending in March 1979. Food-out-of-home prices increased increased by 8.0% for the year ending August 2022, the highest percentage increase on the year since an increase of 8.4% in October 1981.
12-month CPI table
The graph above shows the 12-month percentage change in four categories of the Consumer Price Index. This clearly illustrates that the Federal Reserve is far from achieving its 2% inflation target and has had only a minimal effect in reducing inflation, even though it raised rates during of the last four consecutive FOMC meetings, and that it will almost certainly adopt another significant rate hike of at least 75 basis points.
Even with another rate hike, the Federal Reserve seems unlikely to bring inflation near its target level. The consensus among economists and analysts is that the Federal Reserve will raise rates between 3½% and 4% by the end of the year. However, it should be noted that historically the Fed has had to raise rates to match the level of inflation in order to effectively reduce inflation. It’s also worth noting that even the most aggressive rate hikes of the past by the Federal Reserve have been made over multiple years.
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