Gold in Biggest Weekly Loss Since Nov. on Fed vs Inflation Uncertainty

© Reuters.

By Barani Krishnan

AiVIF.com -- Who will win — the ambitious Fed or the inflation monster?

The uncertainty pushed gold down for a second straight week, to its biggest weekly decline in percentage terms, since November.

Still, pressure on prices combined with concerns about fallout from the Russia-Ukraine war played up gold’s dual economic-political hedge to bring it back above the $1,900 support it briefly broke earlier in the week.

The most-active gold futures contract on New York’s Comex, April, settled down $13.90, or 0.7%, at $1,929.30 an ounce. For the week, the benchmark gold futures contract lost 2.8%, its most since the week to Nov. 19, 2001.

The Federal Reserve approved this week a 25-basis point increase at its March 15-16 meeting, its first increase since the outbreak of the Covid-19 crisis in March 2020. The central bank also cautioned that there could be as many as six more rate hikes this year, based on the number of calendar meetings for its policy-making Federal Open Market Committee, or FOMC.

Following through with the Wednesday rate decision, Fed Gov. Christopher Waller — one of the more hawkish members of the FOMC — said U.S. economic data is “screaming” for bigger half percentage point rate hikes in coming months to stamp out inflation.

Waller’s comments, along with similar hawkish messages from other Fed representatives, helped the dollar rebound Friday, thumbing down commodities denominated in the currency, including gold. The dollar fell more than 1% in the past two sessions combined as currency dealers reacted with disappointment to the Fed’s modest rate hike on Wednesday.

“The dollar is seeing massive inflows and that is short-term troubling for commodities,” said Ed Moya, analyst for Europe at online trading platform OANDA. “The dollar will benefit from a rapidly improving interest rate differential and steady safe-haven flows as investors (become) worrisome over the war in Ukraine's impact on inflation and ultimately growth.”

Fed Chairman Jerome Powell reiterated after this week’s rate increase that the central bank will be “nimble” as it tries to balance the fastest economic growth in nearly four decades with inflation, also growing at its most frenetic pace in 40 years. U.S. gross domestic product was up 5.7% last year after a 3.5% contraction in 2020, growing at its most since 1984. Inflation, measured by the Consumer Price Index, or CPI, expanded by 5.8% in 2021, its most since 1982.

The Fed has two mandates: Aiming for “maximum” employment among Americans with a jobless rate of 4% or below, and keeping inflation at 2% or below a year. It has achieved stellar success with its first target, by bringing unemployment down to 3.8% in February from a pandemic- and record-high of 14.8% in April 2020. But its track record has been miserable on the second, with CPI growing by 7.9% during the year to February, growing even faster than Decembers' 7.0%.

Waller, who has consistently pushed for tighter monetary policy and higher fiscal discipline to tame inflation, said the risks from the Ukraine war led him to support more dovish colleagues on the FOMC in voting for a subdued rate hike at the March meeting.

But he said he might push for a series of 50-basis point increases at coming FOMC meetings to "front load" a tighter policy that would have a greater impact in tamping down inflation.

"Going forward that will be an issue — about going 50 — in the next couple of meetings,” Waller said, anticipating resistance from other FOMC members. “But the data is suggesting we move in that direction. I really favor frontloading our rate hikes. (Let’s) just do it, rather than just promise it.”

Most Fed officials see rates rising to around 1.9% by the end of 2022, if the FOMC keeps to 25-basis point hikes at its next six meetings.

Waller did not specify where he would like the bank’s rate to be by the end of the year. But CNBC said he appeared to be targeting a 2.0-2.25% level based on his push for a mix of 25- and 50—basis point hikes.

In projections issued at this week’s FOMC meeting, three policymakers projected rates should end the year at 2.375%, while one projected a closing rate of 2.625%. The most aggressive of them, St. Louis Fed President James Bullard — who also happens to be Waller’s former supervisor — said rates should end the year at 3.125%.