Gold plummets as Fed Powell doubts current interest rates adequate to tame inflation

Gold price struggles for a sustained recovery as Fed Powell endorsed tightening policy further.
Middle East tensions ease as investors see the war between Israel and Palestine remaining contained.
Next week, the release of the US inflation data will guide further action in the US Dollar and bond markets.

Gold price (XAU/USD) is highly likely to deliver a second straight bearish weekly closing as several Federal Reserve (Fed) policymakers voice support for further tightening. Federal Reserve Chairman Jerome Powell is not confident that the current interest rate policy is sufficiently restrictive to ensure the return of inflation to 2% in a timely manner.

Jerome Powell cited that the Fed is committed to bringing down inflation to 2% and the central bank will not hesitate in tightening policy further if required. Fed policymakers are not confident of achieving price stability through the current level of monetary policy as the United States economy is resilient on the grounds of consumer spending, labor market, and economic performance. Therefore, the majority of policymakers are leaning towards tightening monetary policy further.

In early New York session, Atlanta Fed Bank President Raphael Bostic, said in his commentary, that the central bank needs to do more work on inflation. Bostic sees spending and demand slowing ahead but will take decent time.

Daily Digest Market Movers: Gold price falls while US Dollar steadies

Gold price attempts a recovery after buying interest near $1,950 as fears over Israel-Palestine war escalate. The hopes of a truce between the Middle East nations deteriorate as US President Joe Biden says that he doesn’t see any possibility of a ceasefire in Gaza.
The attacks from the Israeli army on Palestine’s military forces have intensified while a four-hour humanitarian pause each day continues to allow civilians to flee to the southern region of Gaza.
Meanwhile, hopes are high that the war situation in the Middle East will remain contained between Israel and Palestine. If so, safe-haven demand for Gold will diminish.
Gold price is set to decline for the second week in a row as Federal Reserve policymakers lean towards raising interest rates further.
Fed Chair Jerome Powell said that he is unsure whether current interest rates are adequate in the battle against stubborn inflation.
Jerome Powell, in his statement at the International Monetary Fund (IMF), said that the Fed may need to do a little more to tame price pressures prompted by an improvement in the supply of goods, services, and labor.
Powell added that the central bank has kept financial conditions tight, aided by higher bond yields and whilst it doesn’t endorse policy over-tightening, a failure in getting inflation under control would be the biggest mistake.
The commentary from Jerome Powell was surprising as market participants were hoping that he would emphasize the ‘higher for longer’ interest rates narrative but would keep doors open for further policy-tightening due to the resilience of the US economy.
Interim St. Louis Fed President Kathleen O’Neill Paese supported hawkish remarks from Jerome Powell, and said "It would be unwise to suggest that further rate hikes are off the table". Paese emphasized waiting for additional economic and inflation figures before contemplating an interest rate increase.
While Richmond Federal Reserve Bank President Thomas Barkin is less optimistic about progress in inflation easing towards 2%, he remained unsure about raising rates further. Barkin saw some slowdown as likely as higher interest rates have started hitting the economy.
The US Dollar Index (DXY) struggles to extend the upside above 106.00 despite hawkish commentary from Fed Powell. This week, a light economic calendar kept commentaries from Fed policymakers in the spotlight. Next week, the release of the inflation figures for October will be keenly watched.

Technical Analysis: Gold price falls below $1,950

Gold price falls sharply after a short-lived recovery to near $1,950. The downside bias is strong as Fed policymakers are more in favor of tightening monetary policy further.

On a daily time frame, the precious metal has corrected below the 20-day Exponential Moving Average (EMA). The near-term trend is seen consolidating as the 50 and 200-day EMAs have turned sideways.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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