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Gold falls as Powell appears Hawkish in Jackson Hole

Gold falls as Powell appears Hawkish in Jackson Hole
Gold falls as Powell appears Hawkish in Jackson Hole

Powell’s speech at the Jackson Hole symposium confirmed his hawkish stance, sending prices towards $1,700.

Markets reacted quickly to Powell’s speech

Jackson Hole is behind us! What did we learn from Powell’s remarks at this year’s symposium? Good, the Fed Chairman delivered a decisive and strong speech that reinforced the The Fed’s hawkish stance and end beliefs on a fast pivot dovish:

Restoring price stability will probably require maintaining a restrictive policy for some time. The historical record strongly cautions against premature policy easing.

Although Powell did not specify the size of the next interest rate hike, he said that “another unusually large increase may be appropriate at our next meeting.” Importantly, Powell downplayed the deceleration in inflation in July, saying “the single-month improvement is well below what the Committee will need to see before we are confident inflation is coming down. “.

Powell too underlined the Fed’s commitment to providing low and stable prices inflation. He said that:

Our responsibility to ensure price stability is unconditional (…). There is clearly work to be done to moderate demand in order to better align with supply. We are committed to doing this work (…). We are taking strong and rapid action to moderate demand so that it better aligns with supply and to keep inflation expectations anchored. We will continue until we are satisfied that the job is done.

Importantly, Powell recognized the costs of restoring price stability in the form of a drag on aggregate demand and the labor market (and that this would bring “a little pain”, or the so-called hard landing), but he seemed willing to bear these costs to defeat inflation. The logic is simple: since “the wage costs of reducing inflation are likely to rise with a lag,” the Fed should act decisively now until the job is done:

Restoring price stability will take time and requires vigorous use of our tools to better balance supply and demand. Reducing inflation will likely require an extended period of below-trend growth. In addition, there will most likely be an easing of labor market conditions. Although higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also cause hardship for households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Last but not least, Powell made clear that estimates of the long-term neutral level of the federal funds rate – estimated in the June FOMC economic projections at 2.50% – are no place to stop or suspend the cycle of Fed tightening. This means that interest rates can rise significantly. This week, Cleveland Fed Chair Loretta Mester said the Fed will need to raise the federal funds rate to just above 4% by early next year.

Powell’s speech at Jackson Hole pushed the dollar and bond yields higher, while stocks plunged. As shown in the chart below, the yield on US Treasuries fell from 3.03% to 3.12%, while the index fell from 4,199 to 3,955. Additionally, according to CME FedWatch Tool, the probability of a 75 basis point hike in the fed funds rate rose from 64% to 72%, which also put downward pressure on gold prices.

10-Year US Treasury and S&P 500 Yields in 2022

Implications for Gold

What do the Fed’s recent hawkish comments imply for the gold market? Good, they add downward pressure on the yellow metal. As the chart below shows, gold prices gradually slipped in August from $1,800 to $1,700. Powell’s speech in Jackson Hole accelerated this downward trend, pushing the price of gold from $1,754 to $1,716 a week later.

Unfortunately for gold bulls, this downward trend may continue for some timealthough most of the downside risks seem to have already been priced in. The hawkish Fed, a strong greenback and rising real interest rates are clear headwinds for gold that are keeping its price below $1,800 or even lower.

However, remember that talking is cheap. Powell’s speech was resolved, but the question is what will it sound like when the data seriously deteriorates. After all, a recession is virtually inevitable, and the only question is how deep and painful it will be. Therefore, gold is likely to struggle more, but at some point, it should be boosted by the recession and stagflationary tail winds.

Disclaimer: Please note that the purpose of the above analysis is to discuss the likely long-term impact of the presented phenomenon on the price of gold and that this analysis does not indicate (nor is it intended to) whether gold is likely to go higher or lower in the short to medium term. In order to determine the latter, many additional factors must be taken into account (i.e. long-term outlook) in our gold and silver trading alerts.

. Gold falls so Powell appears Hawkish Jackson Hole

. Gold falls Powell appears Hawkish Jackson Hole

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