Powell's rate cut remarks boost: Gold price breaks through $2300 to hit a record high! The price of gold has once again hit a historical high, reaching $2301.04 per ounce, continuing its weeks-long rally. Powell emphasized the possibility of rate cuts starting this year, but the rate cut path remains unchanged. He stated that policymakers will wait for clearer signs of declining inflation before starting rate cuts. Federal Reserve officials maintain expectations of three rate cuts this year. Kugler believes that it would be appropriate to lower policy rates this year due to weak consumer spending. The rise in gold prices is related to Powell's rate cut remarks
According to the Zhitong Finance and Economics APP, after Federal Reserve Chairman Jerome Powell emphasized the possibility of starting interest rate cuts this year, the price of gold hit a historic high again, rising by 0.9% to reach $2301.04 per ounce, continuing its weeks-long upward trend. Powell pointed out that despite recent inflation data being higher than expected, it did not "substantially change" the overall situation. He hinted that policymakers will wait for clearer signs of declining inflation before starting to cut interest rates.
Although Powell reiterated the Fed's wait-and-see attitude, the path of interest rate cuts remains unchanged. Bart Melek, Global Head of Commodity Strategy at TD Securities, stated that this is extremely favorable for the gold market, suggesting that the Fed may make significant interest rate cuts before reaching its inflation target.
Powell further explained in his speech: "Given the strong momentum of the current economy and the trend of inflation, we have time to let upcoming data guide our policy decisions. If the economy develops as we expect, most members of the Federal Open Market Committee (FOMC) believe that it may be appropriate to start lowering policy rates at some point this year."
However, he also warned that it is still too early to determine whether the latest data on inflation represents a rebound in inflation. He believes that it is inappropriate to lower policy rates until there is greater confidence in the continued decline of inflation.
Latest Statements from Federal Reserve Officials on Interest Rates and Inflation
The FOMC kept interest rates unchanged last month, despite key inflation indicators showing a slight increase in 2024, officials still reluctantly maintained the expectation of three interest rate cuts this year. Powell and other Fed officials have repeatedly emphasized that they are not in a hurry to cut interest rates, and policy actions will depend on the upcoming data.
On Wednesday evening, Fed Governor Lael Brainard also stated that she expects inflation to continue to ease and will not cause significant damage to employment or the overall economy, so it would be appropriate to lower policy rates this year.
Brainard said that weak consumer spending should help slow economic growth to below last year's 3.1%, and demand for workers is also slowing down. "With the cooling of demand against a backdrop of steady supply, my baseline expectation is that, absent a significant further rise in the unemployment rate, further slowing in inflation is likely."
She added, "If the slowdown and labor market conditions evolve as I currently expect, then it would be appropriate to lower policy rates somewhat this year." The Fed's preferred measure of core inflation rose by 2.8% in February, significantly higher than the policymakers' target of 2%.
Similarly, Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly spoke on inflation and Fed monetary policy on Tuesday, both emphasizing the importance of adjusting monetary policy based on actual economic data Among them, Mester stated that she still expects the central bank to cut interest rates this year and pointed out that if the data allows, June will be the beginning of the rate cut. As for the pace of this action, she indicated that it may proceed "gradually" if the economy meets expectations. Mester warned that in order to pave the way for a more accommodative monetary policy stance, she needs to see upcoming inflation data align with her predictions of further declines.
In her speech, Mester pointed out that monetary policy is currently in a good position as a strong economy gives the central bank space to collect data before making interest rate changes. She expects inflation to continue to decline, albeit at a slower pace than last year. She also cautioned against cutting rates too early.
Furthermore, San Francisco Fed President Daly stated that it is time to pay more attention to the risks of maintaining high rates for a long time, even though inflation remains above the Fed's target. Daly noted that more progress in inflation decline is needed to lower rates at the Fed, but officials need to be cautious not to keep restrictive monetary policy for too long, risking damage to economic growth or the labor market. This underscores the Fed's dual mandate of ensuring price stability and maximum employment.
Why does gold keep hitting new highs?
Gold prices have risen by over 10% so far this year, continuously breaking historical records. Despite the Fed's expected policy shift being favorable for gold, the significant price increase in gold over the past month often comes with huge fluctuations and lacks clear catalysts, possibly due to investors flocking to the gold market.
As Ford O'Neill, co-portfolio manager of the Fidelity Strategic Real Return Fund, pointed out, fundamentally, gold is performing well because investors are pushing up the prices of almost everything, from stocks to bonds to cryptocurrencies. Meanwhile, under low interest rates, bonds and cash accounts do not have as much competitive advantage compared to gold.
Additionally, Standard Chartered Bank analyst Suki Cooper also noted that the decrease in the number of outstanding futures or options contracts suggests that some traders are closing out their short positions. This closing out behavior, known as "short-covering," means that traders who were previously shorting gold are buying gold to close out their positions to avoid further losses, which may be part of the reason for gold's recent record highs.
The ongoing tensions in the Middle East and Ukraine have also solidified gold's position as a safe-haven asset. Additionally, despite rising interest rates, central banks' "gold absorption" behavior over the past year has supported gold prices at historical highs. According to the latest data from the World Gold Council, central banks continued to increase their gold holdings in February, although the pace has slowed compared to before, marking the ninth consecutive month of net purchases.
Cavatoni of the World Gold Council stated that so far, the rise in gold prices has been driven by significant purchases of gold by central banks worldwide. Due to geopolitical risks, domestic inflation, and a weakening US dollar, major central banks are buying gold to diversify their reserve portfolios.
However, despite gold prices continuously hitting records, the holdings of global gold ETFs have been decreasing. Statistics show that the holdings of global gold ETFs in gold have decreased by over 100 tons so far this year, reaching the lowest level since September 2019