Federal Reserve Chairman Jerome Powell has signaled that the Fed will keep interest rates aggressively high through 2023. After that, gold prices fell below $1,800. However, one market strategist says that rising interest rates will be less headwind for gold, as the US dollar hawk offers less benefit from a Fed.
“In the first half of the year, gold will be in ‘wait and see’ mode”
George Milling-Stanley, chief gold strategist at State Street Global Advisors, says growing recession fears are starting to outweigh the Fed’s aggressive monetary policy stance. The comments came a day after the Fed signaled that raising interest rates was almost over. In its updated economic projections, the Fed predicts that interest rates will peak at 5.1% in 2023.
cryptocoin.comJerome Powell said at the press conference that he does not expect the Fed to cut interest rates at any point next year. Milling-Stanley said, “Powell was categorically clear that rates would rise in 2023. We are still in a dangerously high inflationary environment,” he says.
However, Milling-Stanley says the Fed’s projections and stance could change rapidly as the world moves towards a recession. The strategist expects the Fed to continue raising interest rates in the first half of the year. But he says it will have to cut rates by the end of the year or early 2024. In this context, the analyst makes the following statement:
I think in the first half of the year gold will be in ‘wait and see’ mode. This will reduce demand. I see opportunities where gold goes above $1,800. The world is waiting for signs to see what kind of recession we will enter. And unfortunately, they will have to wait a little longer.
“If we experience a recession, gold prices will rise”
On Wednesday, the Federal Reserve ended 2022 with a 50 basis point increase, raising interest rates to 4.5%. It also marked the most aggressive rate of rate hikes in over 40 years. Milling-Stanley notes that the US economy still does not fully feel the impact of these interest rate hikes. The strategist explains his views on this issue as follows:
I don’t think there is any way the US economy can avoid slower growth in 2023 and that this will affect US monetary policy. If we experience a recession, gold prices will rise.
State Street’s gold price forecasts range widely
Milling-Stanley explains that in the last seven global recessions, gold prices have yielded an average of 20%. With slowing economic activity, the strategist says inflation remains a significant threat. Earlier this week, the US Department of Labor announced that the Consumer Price Index rose 7.1%, falling more than expected. However, Milling-Stanley notes that inflation still remains well above the central bank’s 2% target. The strategist makes the following assessment:
The threat of inflation is not over yet. I don’t think we’ve seen a peak in fees or service costs. Six months ago, we would have looked at a 7% inflation data as a terrible number.
Milling-Stanley expects relatively stable gold prices throughout the first half of the year. State Street’s official forecast sees a 60% chance of gold trading in the fairly wide range between $1,600 and $1,900 in the new year. Looking at the base case, State Street gives a 20% chance for gold prices to drop to $1,500 if the Fed gets inflation under control and avoids a recession. At the same time, he sees a 20% chance of gold prices returning to $2,000.
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