Gold price jumps as Fed’s Powell explains latest change in Fed speak

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(Kitco News) With the banking crisis hitting markets, the Federal Reserve’s monetary policy may have less work to do, according to Federal Reserve Chair Jerome, who played dovish during his news conference, sending gold prices higher.

The biggest change in Fed language following the Silicon Valley bank fallout was a shift from anticipating “continued rate hikes” to “additional monetary tightening.”

“We are no longer stating that further rate hikes will be needed to suppress inflation. Instead, we now believe additional policy tightening may be warranted,” Powell told reporters on Wednesday.

Economic indicators have been stronger than expected since the February FOMC meeting. But events in the banking system are likely to lead to tighter credit conditions and act as an additional tightening mechanism, Powell said.

“Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which in turn would impact economic outcomes. It is too early to say the magnitude of this impact and hence soon how monetary policy should respond,” he said. carefully assess the labor market and inflation.”

When asked for clarification, Powell noted that “fixing” refers to the federal funds rate and urged markets to focus on the words “may” and “some,” as opposed to “ongoing.”

“What we did there is try to reflect the uncertainty of what’s going to happen,” he said, adding that the banking sector is “healthy and resilient.”

Powell spoke after the Fed decided to hike interest rates by a quarter point, the ninth hike in a year. Markets have largely expected this despite the recent turmoil in the banking sector. The federal funds rate is now in a new target range of 4.75% to 5% – the highest since 2007.

More details on the updated dot chart and economic forecasts can be found here.

Powell also ruled out rate cuts this year, stating that a monetary policy reversal is not the Fed’s baseline expectation.

Despite many questions about the contagion risk constraining Fed decisions, Powell said the Federal Reserve’s monetary policy tools are “working.”

When grilled over the Fed’s review of the SVB collapse, Powell indicated that he was interested in understanding what went wrong. “We will find that and then make an assessment of what actions are right to ensure something like this doesn’t happen again,” he said.

Headed for a soft landing, the Federal Reserve Chair said it was too early to tell if the turmoil in the banking sector had had a big impact. “I think that path still exists and we’re definitely trying to find it,” he added.

Another interesting highlight of the press conference was Powell’s admission that the committee had “considered” a pause in rate hikes due to tensions in the banking system, but finally settled on a 25 basis point hike.