What to expect from the FOMC September meeting, and how gold might respond

The Federal Reserve will conclude the September FOMC meeting and release a written statement at 2 PM ET tomorrow. This will be followed by President Powell’s press conference half an hour later. The Federal Reserve is widely expected to raise the “federal funds rate” by 75 basis points. CME’s FedWatch tool predicts an 84% chance of a 75 basis point hike, and a 16% chance the Fed will raise rates by a full percentage point.

In the event that the Federal Reserve is likely to raise the benchmark interest rate by 1%, it will almost certainly put pressure on gold to lower prices. According to MarketWatch, “Economists at brokerage Nomura Securities … became the first to predict on Wall Street a full percentage point increase in the Fed’s short-term interest rate.”

However, if the Fed raises rates by 75 basis points as expected market participants may see some short-covering activity amid the relief recovery. As of 5:05 PM ET gold futures basis, the most active December contract is trading down $5 and steady at $1,673.20.

The hard truth is that after four consecutive rate hikes that began in March, inflation is still very high and persistent. The latest data revealed that the CPI saw a slight decrease from 8.5% in July to 8.3% in August. While the core CPI saw a partial decline, the core CPI, which excludes food and energy costs, rose 0.6%, more than double the increase seen in the previous month. This means that the core inflation rate rose to 6.3% from 5.9% in August.

With August’s core inflation triple the 2% target, the Fed wants to achieve Fed members will continue the very hawkish tone voiced at the Jackson Hole Economic Symposium.

Based on persistently hot core inflation, participants can expect interest rates to continue to rise during the remaining three FOMC meetings in September, November and December. CME’s FedWatch predicts a 38.9% chance the Fed will raise rates to between 400 and 425 basis points and a 44.8% chance that rates will be between 425 and 450 basis points by December 2022.

The interest rate hikes that started in March were the main fundamental events that led to a significant drop in gold prices. After four consecutive interest rate hikes, gold is down nearly 19%, or $400 an ounce.

In his speech last month, Jerome Powell acknowledged the severe implications of lowering inflation. “The Fed’s campaign to curb inflation by aggressively raising interest rates will bring some pain.”

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