Preview of the Fed's Monetary Policy Meeting: Three Factors Drive Tightening Expectations, Gold Price Rally Threatens to "Glass Top"

This week, the Fed will hold regular monetary policy meetings. With continued strong job growth and above-average inflation, economists agree that the Fed may announce that it will accelerate its tapering of its quantitative easing program. After the advent of the Omiljung variant, the stock market became nervous over fears that it would affect the economic recovery during the COVID-19 pandemic. But on Friday, investors appeared to have shrugged off fears of TheOmilon and soaring inflation. The three major stock indexes closed higher last week, recording gains.

In the bond market, the yield on a 10-year Treasury note was little changed at 1.487 percent on Friday, but rose 14.5 basis points that week, the biggest weekly gain since February, according to Dow Jones Market Data. While high inflation and concerns about the pandemic were supportive, higher Treasury yields and a stronger U.S. dollar weighed on the gold market. At the same time, as the Fed meeting becomes the focus of market attention this week, the expectation that the Fed will accelerate the reduction of bond purchases and raise interest rates early makes it difficult for gold prices to obtain a clear upward momentum.

Investors will focus on the Fed's meeting this week, looking for details of its possible hard-line monetary policy shift in the face of high inflation. After the Fed's two-day policy meeting, Fed Chairman Jerome Powell will hold a press conference on December 16. Powell's tough signals during his testimony before the Senate Banking Committee in late November unnerved the gold market.

Three sources of information point to the Fed to speed up the reduction

Fewer and fewer U.S. unemployed: In the week ending December 4, 2021, the number of U.S. workers filing unemployment benefits for the first time fell to 184,000, the lowest level since September 6, 1969, and another piece of evidence of an improvement in the U.S. job market.

Inflation remains hot: The Department of Labor's Consumer Price Index (CPI) data released on Friday showed that U.S. inflation rose again in November, converting to 6.8 percent annualized, the highest level in nearly 40 years. That's the highest rate of inflation since Ronald Reagan became president in 1982.

Jim O'Sullivan, chief U.S. macro strategist at TD Securities, said: "In short, the CPI is basically in line with expectations, but still quite strong. The data adds to the rationale for Fed officials to become tougher at next week's FOMC meeting. ”

Consumers are upset about inflation: According to the latest consumer survey from the University of Michigan, consumer confidence improved slightly in December compared to November. However, inflation continues to weigh on consumers. In fact, according to Richard Curtin, chief economist of the survey, "When asked directly whether the more serious problem facing the country is inflation or unemployment, 76 percent chose inflation, while only 21 percent chose unemployment." ”

The U.S. economy is performing strongly: Real gross domestic product (GDP) grew at an annualized rate of 8.7 percent in the fourth quarter, according to the Atlanta Fed's GDPNow indicator. That's much higher than the average growth rate of 3 percent they expected in Economics 101.

Analysts look ahead to fed meetings

James McCann, ABDN's deputy chief economist, said: "This meeting is really about seeing how far Powell's new hawkish tendencies will go. We expect the Fed to announce an accelerated pace of debt-buying, which would be a major signal that the Fed's endurance to soar inflation has been exhausted. ”

Tom Graff, head of fixed income at Brown Advisory, said: "Time is running out for the Fed and these inflation figures need to show a noticeable slowdown or they will rise once the tightening is over." Graff said he expects the Fed to raise benchmark rates three times next year, possibly starting as early as April.

Liz Ann Sonders, chief investment strategist at Charles Schwab, said the Fed could double the rate at which it scaled back its monthly bond purchases. That means the cuts will end in March instead of June, she said. Sanders believes the market has already fed in on expectations of about three rate hikes in 2022, which is higher than the two hikes she expected.

Rick Rieder, Chief Investment Officer of BlackRock's Global Fixed Income Division and Head of Global Allocation Investment Team, said: "Strong economic growth, a recovery in the labor market and rising inflation have clearly prompted the Fed to accelerate its focus on policy shifts, particularly ending quantitative easing. This shift is long overdue, and it is clear that it will also give the Fed much-needed options to raise interest rates in the first few months of next year, when demand is likely to remain high and inflation remains strong. ”

Reid said: "Some analysts believe that inflation may start to fall later next year. While "sticky inflation" remains a risk, by the end of March, a loosening of supply chain constraints should help slowly reduce the rise in the cost of living to more comfortable levels. It is expected that by the end of 2022, the overall CPI and core CPI may be between 2% and 3%. ”

Barry Gilbert, asset allocation strategist at LPL Financial, also expects inflation to "fall decisively" next year. "We expect inflation to peak in the first quarter, the Fed's bond-buying program to end in March/April, and possibly a rate hike in September 2022," he said in the report. ”

This week, after the Fed's policy meeting, investors will see a dot plot of the rate hike forecast made by members of the Federal Open Market Committee (FOMC) at 03:00 a.m. Beijing time on Thursday (December 16). On Monday (December 23) in the early Asian market, spot gold basically held steady. With no major economic indicators announced earlier this week, markets are likely to trade more cautiously, and while waiting for the Fed meeting, the market will also be watching for new developments in the Omilon variant.

This article originated from Huitong Network