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(Kitco News) – The gold market is off its highs and struggling to stay above $2,000 an ounce as the Federal Reserve signals it will hold interest rates in place restrictive territory for the foreseeable future.
According to the minutes of the central bank’s November monetary policy meeting, the Federal Reserve maintains a slight tightening bias. Although the Fed Funds rate is near a record high, the central bank appears in no rush to lower interest rates in the near future.
“Participants continued to view it as essential that the monetary policy stance be sufficiently restrictive to return inflation to the Committee’s 2 percent target over time,” according to the minutes. “All participants agreed that the Committee was able to proceed cautiously and that policy decisions taken at each meeting would continue to be based on all incoming information and its implications for the economic outlook as well as the balance risks.”
There is not much reaction in the gold market to the Fed’s neutral and elevated stance. December gold futures last traded at $1,999.60 an ounce, up almost 1% on the day.
Although the Federal Reserve expects to maintain higher interest rates for longer, the committee sees growing risks to the economy.
“Participants generally noted a high degree of uncertainty about the economic outlook,” the minutes said.
Positive for the gold market, the central bank is also looking at bond yields as greater volatility has taken a toll on financial markets.
“Participants noted that over the past few months, financial conditions have tightened significantly due to, among other factors, a substantial rise in long-term Treasury yields,” the minutes said. “Participants generally viewed factors such as the fiscal outlook suggesting a larger future supply of Treasury securities than previously thought and increased uncertainty about the economic and political outlook as likely contributing to the rise in Treasury premiums. However, they also noted that, in any case, being the source of the rise in long-term yields, persistent changes in financial conditions could have implications for the direction of monetary policy and “It would therefore be important to continue to closely monitor market developments.”
The committee noted that overleveraged hedge funds remain vulnerable to volatility in the Treasury market, which could force the central bank to intervene to keep yields anchored.
“Several participants emphasized the need for banks to be prepared to use the Federal Reserve’s liquidity facilities and for the Federal Reserve to ensure its own preparedness to provide liquidity during periods of stress,” the report said. minutes.
Several analysts have said that Fed intervention in the bond market to keep yields anchored could trigger a significant rally in gold. Many analysts believe that if the Fed begins injecting liquidity into the market, it will be seen as a new form of quantitative easing and potentially the first step toward the long-term monetization of U.S. government debt.
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