While dollar index and yields fell after Fed’s statement showed the central bank kept interest rates on hold and signalled rate cut after its two-day meeting, gold prices sharply increased as high as $1,386 on Thursday by finding support from dovish Fed. Fed excluded “patient” from its statement and added it would “closely monitor the implications of incoming information for the economic outlook” while underlining that it would act as appropriate to sustain economic expansion. Following the meeting, Fed Chair Jerome Powell said many has changed since the last meeting and especially trade relations posed risk to the economic outlook. Fed also announced its updated forecasts and there was not much change in growth forecast but inflation expectations were lowered and officials now do not expect inflation to hit 2% until 2021.
Gold prices increased sharply and hit the highest level since May 2013 at $1,386 an ounce on Thursday after Fed kept interest rates on hold and signalled rate cut by stating it would act as appropriate to sustain economic growth.
As of 16:25 GMT+3, spot gold was trading at $1,383.12 an ounce while dollar index was down to 96.61. US 10-year Treasury yield was below 2 for the first time since 2016 and was at 1.99.
Phillip Futures analyst Benjamin Lu said on Reuters that the new target for gold was $1,400 an ounce but it would be hard to stay above that level in the long run since investors would possibly head to risky assets due to better conditions.
Federal Reserve announced that it kept the rates on hold after its two-day meeting yesterday and underlined rising risks while adding it would act as appropriate to sustain economic growth. In the statement, it pointed out sustained expansion of economic activity, strong labor market conditions and inflation near target 2% while stating uncertainties on economic outlook increased. Fed said, in light of these uncertainties and muted inflation pressures, the Committee would “closely monitor the implications of incoming information for the economic outlook” while adding it would assess realized and expected economic conditions. St. Louis Fed President James Bullard was the only one who opposed the decision and favored a rate cut in this meeting.
There were couple of changes in the statement comparing to the earlier one. The word “patient” was excluded from the statement and instead, “the Committee will closely monitor the implications of incoming information for the economic outlook” was included while Fed still sees a “sustained expansion of economic activity, strong labor market conditions and inflation near 2% target but added “uncertainties about this outlook have increased.”
Following the meeting, Fed Chair Jerome Powell said “seven weeks ago we had a great job report and the economy and our policy was in good place” while adding news about trade had been an important driver of sentiment. Powell also said Fed would act as needed, including promptly if appropriate, and use tools to sustain economic expansion while underlining that the question was whether these risks would continue to weigh on the outlook.
Fed also announced its updated forecasts including interest rate expectations. According to this, there is no rate cut expected in 2019 but one rate cut is forecasted in 2020. In March projections, 25 basis point rate hike was expected. In addition to this, 8 out of 17 policymakers expect a rate cut in 2019 while 8 of them foresee no change in the interest rates and 1 expects a rate hike. On the other hand, there is no change in growth expectations except increasing 2020 growth expectation to 2% from 1.9% while inflation expectations were lowered from 1.8% to 1.5% in 2019 and from 2% to 1.9% in 2020. Unemployment forecasts were downgraded by 10 basis point for each year.
JP Morgan Funds chief global strategist David Kelly said one rate cut was on the table in 2019 however underlined his concerns that the expected rate cut would be harmful for the economy rather than being supportive since people would wait for lower rates. Analysts expect at least two rate cuts this year and one of them is expected to take place in July.