Gold prices have built up a strong price range this year. The biggest factor weighing on the commodity's price was the Federal Reserve's aggressive fight against inflation. However, the Fed's rate decision and the risk of a recession add pressure to the gold market.
The Fed increased its benchmark lending rate by 75 basis points for the third time in four years. This marks the toughest policy move in the 1980s. It puts the Fed in a position of battling the worst recession since the Great Recession of 2007. Ultimately, the Fed's decision will likely deepen economic pain for millions of Americans.
While the economy is slowly recovering, the Fed will continue to aggressively fight inflation. Among other things, the Fed has begun to purchase Treasury securities and reinvest only a portion of its maturing securities. These purchases allow the central bank to meet its demand for currency while keeping its asset holdings as a percentage of GDP relatively unchanged.
In its forecast, the Fed projects that inflation will remain below its 2 percent target until 2025. For that reason, the Fed has pushed the upper bound of its benchmark range higher. By the end of the year, the forecast shows inflation will be at 2.2%.
The FOMC will announce its latest decision on Wednesday, September 20. The committee's meeting begins at 2:00 p.m. and will be followed by a press conference from Fed Chair Jerome Powell. Most economists expect the Fed to raise interest rates by 75 basis points. That would raise the policy benchmark range to 3% to 3.25%.
The FOMC's decision will put the dollar on edge, and the dollar-gold correlation could strengthen. But with inflation still a major factor, it's possible that gold will suffer less than when it sold off in 2022.
As the dollar and US interest rates rise, investors will feel the need to buy safe-haven assets like gold, and those holding non-yielding assets may lose their incentive to hold those assets. Those who hold gold should be cautious, though, because the price can continue to rise exponentially as more and more investors exit the market.
The FOMC will likely remain united behind Chairman Powell's fight against inflation, and the FOMC's outlook will indicate that price pressures will continue to be a driving force in the Fed's monetary policy. However, the FOMC will also provide some less hawkish guidance, such as the addition of "over time" to its inflation rate target.
The Fed will also continue to purchase Treasury securities, but in smaller amounts. By 2022, the Federal Reserve plans to reduce its balance sheet through quantitative tightening. At the same time, the Fed is expected to maintain a relatively low federal funds rate. If the economy continues to struggle, the Fed may not be able to ease its monetary conditions.
Although inflation is still the main factor driving Fed policy, the potential for a recession next year may lessen the negative impact of its elevated interest rates. Likewise, if the US economy slows down, the Fed will be less tasked with fighting against weak economic data, and the dollar will strengthen.