Fed stands pat on interest rates—gold surges on the news

Federal Reserve Bucks 1-3 Odds of Rate Hike Today

Under the leadership of new Federal Reserve Chairman Kevin Warsh, the central bank held its benchmark interest rate steady in the 3.5%-3.75% range today. Wall Street traders had estimated there was a one-in-three chance the Fed would hike interest rates to fight back against still-high inflation that has been worsened by the war raging in the Middle East.

Three members of the Fed dissented in today’s decision, instead wanting a quarter-point interest rate hike. Chairman Warsh was not one of them. The three dissents reveal that some on the Fed committee are running out of patience with too-high inflation that has been painful for everyday Americans at the gasoline pump and the grocery store.

Markets React

Gold immediately after the Fed news and has been trading steadily to higher in recent weeks, trading above the key $4,000 level. Gold gained because bullion benefits from a steady to lower interest rate environment as the metal pays no interest. In other markets, the U.S. dollar sank sharply, and stocks pared earlier losses slightly following the Fed news.

Inflation Above Fed’s Target for Five Years Now

Pressure has been building on the central bank to hike interest rates to battle still-high inflation in the U.S. However, the most recent June consumer price index (CPI) revealed a modest 0.4% decline to a 3.5% annual rate. The slight drop in inflation last month provided “cover” for those on the Fed who don’t want to raise interest rates. But, despite June’s small drop in CPI inflation, the annual rate has stood well above the Fed’s 2% inflation target for over five years now.

The U.S. war in Iran, now entering its sixth month, has boosted energy prices, which in turn have sent consumer prices higher this summer. The price of a gallon of gas now averages $4.09 in the U.S.—and that’s up sharply from a year ago at $3.13, according to AAA. Higher energy costs affect the price of nearly everything in the economy from milk to televisions to clothing. Goods are often transported using trucks, and the higher transportation costs generally get passed along to consumers.

Chairman Warsh Remarks

At a post-Fed meeting press conference, Chairman Warsh reaffirmed the Fed’s commitment to a 2% inflation target. He also told reporters that the “economy is showing impressive resilience” and even with recent shocks, trends are positive.

Key takeaway?

Today’s inaction by the Fed reveals growing soft power by the new Chairman. It remains to be seen whether or not Warsh can hold off on rate hikes later this year. Wall Street will be watching the upcoming inflation and jobs reports closely for clues. The new Fed Chairman has stated the central bank will be giving less “forward guidance” to markets on where interest rates will go next. That leaves the door open for market volatility as investors are less prepared for what may come next.

Big Picture for Gold?

While the correction phase in gold recent months may have been unsettling for some investors, Wisdom Tree called it “a healthy reset rather than the end of the structural bull market,” in a July research note to clients.

Wall Street firms by and large remains positive on the outlook for gold ahead. This week, State Street Investment Management predicted that the next $1,000 move in gold will likely be higher. UBS forecasts gold to jump to $5,200 by mid-2027.

Gold has built a base above the $4,000 level. The next big move is expected to be higher. If you’ve been waiting for the right time to increase your allocation to precious metals—this is it. Don’t wait too long to take action. Before you know it gold could be $300, $500 or even $1,000 higher than it is today.