Federal Reserve raises interest rates

Marco Green
June 13, 2018

More than today's rate hike, the gold market is reacting to the Federal Reserve's guidance on future interest rates.

As expected, policymakers at the central bank hiked the benchmark federal funds rate by a quarter percentage point.

The Fed now foresees four rate hikes this year, up from the three it had previously forecast.

Fed policy makers now see US unemployment at 3.6 percent in the fourth quarter, followed by 3.5 percent in 2019 and 2020, based on median projections.

In another hawkish development, the Fed has also removed its forward guidence in its monetary policy statement. However, the focus will be on the updated economic projections and the dot diagram, which will reveal the expectations of the number of rate hikes in the remainder of the year.

August gold futures last traded at $1,299.20 an ounce, relatively unchanged on the day. The U.S. central bank is also more optimistic on economic growth and further strength in the labor market.

US central bankers again emphasized on Wednesday that the goal is "symmetric", and they said in minutes of the May meeting that "a temporary period of inflation modestly above 2 percent" would help anchor long-run inflation expectations around the target.

The median estimate for economic growth this year rose to 2.8 percent from 2.7 percent in March, with projections unchanged for 2.4 percent in 2019 and 2 percent in 2020.

The committee sees further declines the unemployment. Unemployment is already at 3.8 percent, the lowest since 2000, and the Fed believes it will fall to 3.6 percent by the end of the year, which would be the best rate since the 1960s.

The central bank also lifted its growth forecast to 2.8 percent this year, up a small amount from its projection of 2.7 annual growth in March. With higher interest rates, this means that real interest rates will push higher.

The Fed's short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in the central bank's battle in recent years to return monetary policy to a normal footing. Inflation expectations are slightly higher this year compared to March's forecast of 1.9%. USA payrolls expanded by more than 1 million workers in the first five months of 2018, reaching the milestone faster than in the previous two years. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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