Gold remains relatively quiet as market participants await the start of tomorrow’s FOMC meeting. As of 5 PM ET on a gold futures basis, the most active December contract is currently trading at $1,685 with a net gain of $1.50 today. The December contract opened at $1,685.40 and traded as low as $1,667.60 and as high as $1,688.80.
This is in contrast to other precious metals, where palladium futures are up 5.55%, platinum futures are up 2.28%, and silver is up 1.03%. All precious metals made partial gains based on the weak dollar. The dollar index is currently stable at 109.34 after taking into account a decline of 0.15%.
Market participants are expecting the Federal Reserve to announce its latest rate hike after this week’s Federal Open Market Committee meeting on Wednesday. Beginning in March of this year, the Federal Reserve raised the “fed funds rate” for the first time since 2018 by 25 basis points. They kept raising rates at the May, June and July Fed meetings. The net result was the Fed moving interest rates from near zero to their current level of 225-250 basis points. According to CME’s FedWatch tool, there is an 82% chance that the Federal Reserve will raise interest rates by 75 basis points on Wednesday. This will be the third rate increase of 75 basis points this year.
The Fed is focused on bringing inflation down to an acceptable level of around 2%. However, inflation is still very high and persistent. The CPI hit a 41-year high in June at 9.5%. The latest data revealed that inflation is still very high as it reached 8.3% in August.
Most of the drop in inflation is directly attributable to lower energy costs, with the Gasoline Index falling 7.7% in July. However, inflation in other necessities continues to rise. Food prices at home rose 13.5% for the year ending in August.
According to the BLS, “During that period, food prices at home increased 13.5 percent, the largest 12-month increase since the period ending March 1979. Food prices away from home rose 8.0 percent for the year ending August 2022, the largest A year-over-year percentage increase since an 8.4 percent increase in October 1981.”
12 month per inch chart
The chart above shows the percentage change over 12 months in four categories in the CPI. It clearly shows that the Fed is far from reaching the 2% inflation target and has had only little effect in lowering inflation even though it has raised interest rates in the last four consecutive meetings of the Federal Open Market Committee, and is almost certain to force another significant increase in Interest rates are at least 75 basis points.
Even with another rate hike, it seems unlikely that the Fed will bring inflation close to target. The consensus among economists and analysts is that the Fed will raise interest rates to between 3% to 4% by the end of the year. However, it should be noted that the Federal Reserve has historically had to raise interest rates to par with the inflation level to effectively reduce inflation. It should also be noted that even the boldest price hikes in the past by the Federal Reserve have been achieved over many years.
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