Welcome to Kitco News’ 2022 outlook series. The new year will be filled with uncertainty as the Federal Reserve looks to pivot and tighten its monetary policies. At the same time, the inflation threat continues to grow, which means real rates will remain in low to negative territory. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2022.
(Kitco News) Gold pared its losses and rose to new daily highs as Federal Reserve Chair Jerome Powell’s press conference was deemed not as hawkish by the markets following the central banks’ decision to double its tapering pace.
It is “really appropriate” to make this monetary policy shift due to the current state of the U.S. economy, inflation, and wages, Powell told reporters on Wednesday.
“The unemployment rate [is projected] to decline to 3.5% by the end of the year … while inflation will run above our 2% goal well into next year,” he said. “Price increases have now spread to a broader range of goods and services.”
Powell clarified that the risk of persistently higher inflation is now greater, which justifies accelerated tapering pace.
Prior to the press conference, the Fed announced that it would be doubling its tapering pace to $30 billion a month. This change will conclude the Fed’s asset-purchasing program in early 2022.
The updated dot-plot also revealed that Fed officials are now projecting three quarter-point rate hikes in 2022.
During the press conference, Powell stressed that the timeline for lifting rates depends on conditions for maximum employment being met. He added the Fed would be looking at wages, job openings, unemployment rate, and more. “We are making rapid progress towards maximum employment.”
The Fed likes to look at wages and quits rates. “The great signals are wages and quits rates. People quit because they think they can get a better job. There is a record amount of that going on. Suggests tight labor market.”
The U.S. won’t be returning to the same economy as before the pandemic, changing the conditions for full employment.
“The post-pandemic labor market will be different. The maximum level of employment evolves over time. The important metric that has been disappointing is the labor participation rate. That return to higher participation will take longer,” Powell explained. “We don’t have a strong labor participation recovery yet. But we have to make policy changes now with inflation above our target.”
Powell pointed out that the Fed will not raise rates until the taper is complete. “Buying assets is adding accommodation, raising rates is removing accommodation. Since we’re two meetings away from completing the taper, assuming things go as expected, if we want it to lift off before then, we would stop the taper potentially sooner. But it’s not something I expect to happen,” he said.
The Fed Chair also responded that his renomination had nothing to do with this policy shift, explaining that it became clear this fall that inflation was more significant and more persistent.
“One of the consequences of that is we moved taper forward. We are adopting … We got a strong employment report and revisions to the prior readings. And we got hot CPI. At this point, we decided we need to look at speeding up the taper,” he stated.
Powell noted that this year’s inflation is not the same inflation the central bank was looking for in their previous framework. “Supply-side barriers led to a vertical supply curve,” he said.
The central bank head added that the Fed has to make changes to its policy in real-time, which poses several complications. “One of the complications is we have to make policy in real-time. You have to make an assessment of what is the level of maximum employment that is consistent with price stability in real-time,” he said when explaining the decision to speed up tapering. “What does the labor market look like in the world without COVID? That is something we’d like to see. But that doesn’t look like that’s coming any time soon.”
The two big threats to getting to maximum employment are COVID and inflation, Powell clarified. “There is a broad expectation that the bottlenecks will alleviate some time next year. Our policy should begin to have an effect on that as well. We can’t act as though it is a certainty. There is a real risk now that inflation may be more persistent, which may put inflation expectations under pressure. Risks of persistent inflation have increased — that’s the reason behind our move today. We are prepared to use our tools so that higher inflation doesn’t get entrenched,” Powell explained.
The top risks identified by Powell were the emergence of a new variant that is vaccine-resistant and cyber risk.
In response to Powell’s press conference, gold erased earlier losses and hit new daily highs. February Comex gold futures were last trading at $1,778.50, up 0.35% on the day.
“Given the market reaction – stocks higher and bond yields marginally higher – it appears that the Fed had successfully communicated this news ahead of time,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “We are taking a cautious approach to the market at this time by reducing risk and staying diversified as the potential range of outcomes is large. Whether inflation gets out of control or whether the Fed acts aggressively to contain inflation by raising rates quickly and causes a recession, the impact on portfolios will be different and it’s unwise in our opinion to assume that either of those outcomes is a sure thing.”
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