Editor’s Note: The article was updated to reflect changes in prices.
(Kitco News) – After a brief rally, gold prices have pushed back into negative territory after Federal Reserve Chair Jerome Powell said that the central bank will let inflation pressures creep higher.
In his much anticipated speech at the annual Jackson Hole central bank summit, Powell said that the U.S. central bank will target average inflation and put emphasis on ‘broad and inclusive’ employment.
Looking at inflation, Powell said: “following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
“In conducting monetary policy, we will remain highly focused on fostering as strong a labor market as possible for the benefit of all Americans. And we will steadfastly seek to achieve a 2 percent inflation rate over time,” he said.
Commodity analysts have noted that rising inflation will continue to push real interest rates lower, a key driver for long-term gold prices. After quickly rising to the daily high of $1,987 an ounce, December gold futures then plunged down to $1,929.70 an ounce, down 1.17% on the day.
Royce Mendes, senior economist at CIBC, said that markets have been anticipating the central bank’s shift in monetary policy and bond yields are pushing lower to reflect the Federal Reserve’s shift to loser monetary policy.
“The change means that the central bank will be more willing to stimulate the economy even as the unemployment rate falls, specifically leaving the fed funds rate at the effective lower bound for longer than previously expected.
Although the Federal Reserve is looking for inflation to rise above 2%, during the question and answer portion of Powell’s presentation, he tried to temper some market expectations. He said that he expects inflation will only moderate overshoots and that they won’t be permanent.
While the Federal Reserve’s new “average” inflation target could lead to an looser monetary policy stance and more stimulus, Paul Ashworth, chief U.S. economist at Capital Economics said that he does not think it will lead to more economic growth.
“With long-term interest rates already very low and the Fed still ruling out negative rates as undesirable, we don’t expect that additional stimulus to provide any significant boost to the real economy. That means the Fed might struggle to hit its 2% inflation rate at all, let alone deliver above-target inflation,” he said. “The bottom line is that monetary policy is approaching its limits and, while Fed officials would never admit that publicly, that explains why they have become so outspoken in encouraging Congress to put more fiscal stimulus in place.”
Author: Neils Christensen