Gold prices are slightly more postive following the Federal Reserve’s decision to hold interest rates unchanged; however, the central bank left the door open for a possible rate hike by yearend.
After leaving interest rates unchanged within its range between 0.25% and 0.50%. the Federal Reserve was slightly more optimistic in its comments regarding the U.S. economy, saying in its monetary policy statement that “activity has picked up from the modest pace seen in the first half of this year.”
In an effort to keep the door open for a December rate hike, the bank said, “The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.
December Comex gold futures last traded at $1,331.60 an ounce, up more than 1% on the day, slightly up from where prices were trading ahead of the statement.
Although there is still the risk of a looming rate hike, Mike Draghosits, senior commodity strategy at TD Securities, said that gold is seeing a bit of a rally following the statement because the Fed is in no hurry to raise interest rates.
“We saw gold selloff last week as there was a risk that there could be two rate hikes this year. Now at most there is only going to be one,” he said. “The bigger picture for gold is that we are in a low interest rate world.”
Gold prices are reacting to the fact that the central bank committee has reduced its medium and long-term interest rate expectations. According to the Fed’s dot plot projections, the average expectations are for interest rates to be around 0.6% for the rest of this year. Expectations dropped sharply to 1.1% in 2017, down from 1.6% forecasted in June. Interest rates in 2018 are expected to be around 1.9%, down from 2.4% called for in June. By 2019, interest rates are expected to rise to 2.6%. This is the first time the Fed has included forecasts out to 2019.
According to the latest economic projections, the Fed expects U.S. gross domestic product to expand by 1.8% this year, down from June’s projection of 2%. For 2017, it expects to see economic growth of 2%, unchanged from the previous forecast. For 2018, the central bank expects the U.S. economy to grow by 2.0%, unchanged from the previous estimate. The Fed expects to see 1.8% growth in 2019.
The Fed slightly adjusted its outlook on the labor market as it expects the U.S. unemployment rate to hit 4.8%, up from June’s forecast of 4.7%. For next year, the central bank is expecting an unemployment rate of 4.6%, unchanged from its previous forecast. For 2018, it expects the unemployment rate to fall to 4.5%, down from the previous forecast of 4.6%. For 2019, the Fed sees the unemployment rate rising to 4.6%.
The Fed left its inflation outlook relatively unchanged, forecasting personal consumption expenditures (PCE) to come in at 1.3% this year, down from the previous forecast of 1.4%. The Fed's 2017 outlook on inflation stands at 1.9%, unchanged from the previous estimate. The central bank is expecting inflation to hit 2.0% by 2018. Inflation is expected to remain at 2% for 2019.
Core inflation expectations, which strip out volatile food and energy prices, were also relatively unchanged. For this year, the Fed expects core PCE to come in at 1.7%, unchanged from June’s expectations. The 2017 estimate was raised to 1.8%, down from the previous forecast of 1.9%. The central bank is not expecting to hit its inflation target of 2.0% until 2018, unchanged from the previous outlook. Core inflation is expected to rise 2.0% in 2019.
By Neils Christensen of Kitco News;