Market Insights

Higher for Longer

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An image of Fed chair Jerome Powell for an article about the central bank keeping rates higher for longer

During last Wednesday’s FOMC meeting, the Fed chose to keep the benchmark interest rate high. 

And Fed Chief Powell suggested three rate cuts may still be on the table in 2024, possibly starting in June. 

These potential rate cuts may supply a major tailwind for gold because gold tends to rise when interest rates drop and investors shift out of income assets to defense assets. 

But for now, it’s still a waiting game.  

And the Fed’s decision to not lower the rate has ruffled some feathers on both sides of the aisle in Washington. 

In a letter to Powell, Democrat lawmakers wrote, “We write to urge the Federal Open Market Committee (FOMC) to seriously consider the harmful economic consequences of maintaining excessively high interest rates for an unnecessarily long period of time…”  

RNC Spokesperson Anna Kelly said, “Under Joe Biden, the Fed hiked interest rates to the highest level in 23 years—making life harder for families already struggling with the impact of Bidenflation.” 

The lawmakers’ comments highlight the double whammy we face when inflation is already “taxing” the dollar’s purchasing power and high interest rates make borrowing more expensive. 

In August 2022, Powell acknowledged the challenges and said: 

“These are the unfortunate costs of reducing inflation.” 

Now, the Fed finds itself caught in a sticky situation: 

Ease rates too soon and inflation might persist or even rise. Cut too late and the economy may buckle under inflation’s growing weight.  

Everyone is feeling the squeeze, including the federal government, because… 

Washington needs a LOT more money to stay afloat. 

Last Saturday—two days after the Fed said rate cuts are coming soon— the Senate quietly passed a last-minute $1.2 trillion spending package.  

Meanwhile, gold hit another all-time high last week. 

That’s the fifth price record for gold this month. 

And Fortune notes, “… the move has been driven by more than the prospect of lower interest rates. Central banks’ precious metal buying spree and rising geopolitical risks amid the Red Sea crisis and U.S.-China tensions have also bolstered the safe-haven asset.” 

In other words… 

Anticipation of lower rates against a backdrop of rising economic and geopolitical turmoil, mixed with potentially insurmountable government debt, has investors pouring money into gold now to defend their purchasing power and get ahead of another possible rally. 

According to CME’s FedWatch tool, investors are pricing in a 64% chance of rate cuts starting in June. 

And when rates finally drop, gold will have plenty of room to run even “higher for longer.” 

Bank of America analyst Jared Woodard said in a note, “More investors could enter the market if yields fall and could help push the gold price to … around $2,500–$2,600.” 

Stay tuned…

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