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Gold (XAUUSD) snapped 3-day losing streaks Wednesday and surged to a high of 1847.85 as US bond yield slips on less hawkish Powell talks. Earlier Gold made a 4-day low around 1823.49 in the early European session Thursday amid ultra-hawkish Fed jawboning but assuring no outright recession. In the last few days, almost all Fed policymakers are stressing 50/75 bps rate hikes in July along with ongoing hikes in the rest of September, November and December either at 50 or 25 bps, depending upon the actual inflation and inflation expectations trajectory.
Although Fed is preparing the market for faster tightening and economic slowdown (moderation), by and large, Fed as well as the White House does not see an outright recession down the line. Fed is also signaling rate cuts in early 2024 or even QE-5 to boost the economy.
On Thursday, all focus was also on Powell’s comments in his semi-annual Congressional testimony. Dow Future and also Gold stumbled early European session Thursday on the concern of more hawkish Powell talks But eventually Dow/Wall Street Future, Gold surged early U.S. session. The US10Y bond yield also retreats to +3.137% from the recent high of +3.495% made on 16th June (after the Fed hiked surprisingly by +0.75%).
In his Congressional testimony, Powell does not say anything new but also refrained from commenting about 75/50 bps rate hikes in July. But Powell also said there are signs of plateauing of sequential core PCE inflation and overall, Fed’s tightening action should moderate the growth of the economy to pave the way for constrained supply to catch up. Powell said Fed’s measured tightening action should cool the economy moderately without causing an outright recession and in the meantime, expected supply line resolution over time will eventually remove the present imbalance between elevated demand and tight supply, resulting in lower inflation. But Powell also didn’t rule out another jumbo rate hike like a 100 bps move to control inflation/inflation expectations if required. On Thursday, Gold also slips from around the session high of 1847 after Powell didn’t rule out any rate hike move in the future by +1.00%.
Semiannual Monetary Policy Report to the Congress: Chair Jerome H. Powell
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
“Chairman Brown, Ranking Member Toomey, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve's semiannual Monetary Policy Report.
I will begin with one overarching message. At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses. It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all.
I will review the current economic situation before turning to monetary policy.
Current Economic Situation and Outlook
Inflation remains well above our longer-run goal of 2 percent. Over the 12 months ending in April, total PCE (personal consumption expenditures) prices rose 6.3 percent; excluding the volatile food and energy categories, core PCE prices rose 4.9 percent. The available data for May suggest the core measure likely held at that pace or eased slightly last month. Aggregate demand is strong, supply constraints have been larger and longer-lasting than anticipated, and price pressures have spread to a broad range of goods and services.
The surge in prices of crude oil and other commodities that resulted from Russia's invasion of Ukraine is boosting prices for gasoline and fuel and is creating additional upward pressure on inflation. And COVID-19-related lockdowns in China are likely to exacerbate ongoing supply chain disruptions. Over the past year, inflation also increased rapidly in many foreign economies, as discussed in a box in the June Monetary Policy Report.
Overall economic activity edged down in the first quarter, as unusually sharp swings in inventories and net exports more than offset continued strong underlying demand. Recent indicators suggest that real gross domestic product growth has picked up this quarter, with consumption spending remaining strong. In contrast, growth in business fixed investment appears to be slowing, and activity in the housing sector looks to be softening, in part reflecting higher mortgage rates. The tightening in financial conditions that we have seen in recent months should continue to temper growth and help bring demand into better balance with supply.
The labor market has remained extremely tight, with the unemployment rate near a 50‑year low, job vacancies at historical highs, and wage growth elevated. Over the past three months, employment rose by an average of 408,000 jobs per month, down from the average pace seen earlier in the year but still robust. Improvements in labor market conditions have been widespread, including for workers at the lower end of the wage distribution as well as for African Americans and Hispanics. A box in the June Monetary Policy Report discusses developments in employment and earnings across all major demographic groups. Labor demand is very strong, while labor supply remains subdued, with the labor force participation rate little changed since January.
The Fed's monetary policy actions are guided by our mandate to promote maximum employment and stable prices for the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our 2 percent objective.
Against the backdrop of the rapidly evolving economic environment, our policy has been adapting, and it will continue to do so. With inflation well above our longer-run goal of 2 percent and an extremely tight labor market, we raised the target range for the federal funds rate at each of our past three meetings, resulting in a 1-1/2 percentage point increase in the target range so far this year. The Committee reiterated that it anticipates that ongoing increases in the target range will be appropriate. In May, we announced plans for reducing the size of our balance sheet and, shortly thereafter, began the process of significantly reducing our securities holdings. Financial conditions have been tightening since last fall and have now tightened significantly, reflecting both policy actions that we have already taken and anticipated actions.
Over the coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy. We will make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored.
Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty in what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy.
To conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price-stability goals.
Thank you. I am happy to take your questions.”
· Fed rate hikes will not bring down food or gas prices
· You will see continued expeditious progress toward higher rates
· The market has been reading our reaction function reasonably well
· The most recent inflation indicators suggested we needed to accelerate the pace of rate hikes
· A string of additional rate hikes are priced in and that is appropriate
· We need above neutral modestly restrictive policy and that's where we're headed
· It's only at the very short end that real rates are negative
· We've never used rules (such as Taylor rules) in a big way to set policy in real-time (practically)
· Fed used discretionary rather than rule-based monetary policy in reality
· The US economy is very competitive, some sectors less so
· Price inflation is a macroeconomic question now to Fed rather than Russia-related geopolitical issues
· Fed intends to moderate the slowdown of the extremely elevated demand to give time so that the existing supply capacity of the economy matches demand and inflation comes down
· We're focused on a core portion of inflation that we can address
· We can reduce the demand
· We don't think we've seen the full effect of lockdowns in China yet
· Inflation in the US is more about demand compared to European countries, where elevated energy prices play a major role
· Congress can help increase supply over the medium term, but probably not over the short term
· Congress can invest in human and physical/traditional infrastructure
· I was persuaded that we needed to make the 75-bps move now
· Our policy rates are still relatively low. We want it up to a more neutral-ish level
· The longer-run neutral level is around 2.5%
· It is a possibility our rate rises could cause a recession
· It will be suitable to raise rates to a moderately restrictive level
· Unrealized losses on our balance sheet have no effect at all on our decisions on policy
· We said we'll look at selling MBS when balance sheet reduction is well underway
· Everything depends on data. We'll do that by raising rates, but how far we go is data-dependent
· Lowering inflation will put the economy back on track, ensuring a period of sustainable maximum employment
· We are far from target on inflation
· The labor market is unsustainably hot
· Global (Russia-Ukraine war; Chinese zero COVID policy) events have made it more difficult to achieve our goals
· There is some evidence of wage growth flattening out
· We don't think we'll need to cause a recession
· The rate of current wage growth is not consistent with 2% inflation over time
· Current wage growth is inconsistent with 2% inflation
· We don't want to reduce wages
· We want a more sustainable rate of increase
· There are restrictions on housing construction. We might find there's not enough at the right price
· Rate hikes should have an impact on interest-sensitive house prices fairly quickly
· We're seeing a slowdown in housing
· So far, there have been no significant macroeconomic effects from the crypto decline
· Better cryptocurrency regulation is needed
· Custody assets have always been on the off-balance-sheet, and the SEC's decision on digital assets is something we are considering
· Markets have been operating reasonably well
· The banking system is very strong
· Ultimately, we need to see progress on the supply side, but we're not waiting for it
· This could be an unusual situation, with the possibility of a sharp decline in prices
· There is a way to bring inflation down to 2% with less troubling effects
· Our goal is for a soft landing, going to be very challenging; it has been made more challenging in the last few months (because of the Russia-Ukraine war)
· We want to get the housing market back on to a more sustainable path
· I think you will see an increase in housing prices to slow pretty significantly now
· Housing demand is moving quite a bit
· Interest-sensitive spending is an important aspect of how our tools work
· We need compelling evidence that inflation is declining, which we don't have right now
· The Fed will take whatever steps are necessary to restore price stability
· Powell when asked about a rate hike of 100 bps: I will never take anything off the table
· Core PCE has moderated over the course of this year
· I don't see the likelihood of a recession as particularly high right now
· The world of Stablecoins lacks the necessary regulatory scheme
· We need a framework for stablecoins and other digital assets
· Inflation was high, certainly, before the war in Ukraine broke out
But Powell is also quite right that now, in reality, there is an urgent need for supply chain resolution not only from China (zero COVID policy) and also from Russia-Ukraine/East Europe for easing of inflation. But as long as Russia-Ukraine geopolitical tensions and subsequent G7/US economic sanctions remain, supply chain issues and inflation will linger despite Fed tightening.
In that sense, the market may be now looking into the Biden-Xi meeting, in which, apart from Trump tariff issues, Biden may also discuss Russia-Ukraine and a possible ceasefire solution. As Chinese President Xi has a strong influence on Putin; especially under the current geopolitical situation, where apart from China, India, and a few other small countries, almost all other big countries are isolating Russia. Also, Russia/Putin-induced global inflation and subsequent synchronized global recession will be negative for Chinese exports/economy too. Thus, ahead of Nov’22 mid-term election, Biden may seek his close friend Xi’s active help for a proper resolution of Russian aggression on Ukraine and control of inflation.
White House/Democrats are now realizing that without the Russian ceasefire, inflation will not come under control and the resultant rapid Fed tightening will eventually cause an outright economic recession, resulting in significant job losses for millions of ordinary Americans, which can cause Biden not only Nov’22 mid-term election (trifecta) but also Nov’24 Presidential election. Thus for the sake of Biden’s interest, Biden should ensure a Russian ceasefire, so that commodities including energy and foods get cooled and inflation comes down significantly.
Gold is a prime beneficiary of Russian geopolitical tensions, higher oil, higher inflation and the attraction of 3D (debt, deficit and currency devaluation). Thus any concrete signal of a ceasefire between Russia and Ukraine, cosponsored by U.S./NATO would be negative for Gold and vice-versa.
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