(Kitco News) – The gold market is pushing into positive territory as the Federal Reserve reiterates its stance that interest rates are not going anywhere anytime soon even as growth and inflation expectations jump significantly.
As expected, the Federal Reserve left interest rates unchanged within its zero-bound range. Although interest rates are expected to remain low, the central bank is fairly optimistic on economic growth through the end of the year, according to the latest economic projections.
The central bank also noted a slight improvement in economic conditions compared to the last time it met in January.
“Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak,” the central bank said. “Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.”
However, even as the economic recovery picks up steam through 2021, the central bank committee still doesn’t see higher interest rates through 2023. In its latest interest rate projections the U.S. central bank expects interest rates will remain unchanged through 2023, unchanged from its December outlook.
The gold market is seeing some positive moves following the Federal Reserve’s latest monetary policy decision. April gold futures last traded at $1,734.60 an ounce, up 0.23% on the day.
Providing a tailwind for gold, the U.S. dollar has lost ground as the central is not expected to raise interest rates until at least 2024.
Although the Federal Reserve, has significantly upgraded its growth forecast this year, Avery Shenfeld, senior economist at CIBC said that this is not going to be a major concern for markets.
He added that the dot plots shows a surprising dovish tilt to the committee.
“The Fed tried to tell markets to take a chill pill, improving their outlook for the US economy, while avoiding scaring bond investors by downplaying the usual hawkish consequences of that economic upgrade,” he said. “The Fed is telling us that the outlook is better, but don’t worry your little heads too much about rate hikes ahead. Although, by saying conditions are still accommodative, it suggests it’s not that concerned with increases in bond yields thus far.”
Looking at growth, the Federal Reserve expects U.S. gross domestic product to increase 6.5% this year, compared to the previous forecast of 4.2%. Looking to 2022 the central bank projects that GDP will increase 3.3% compared to the December forecast of 3.2%. By 2023 GDP growth is expected to level out, increasing 2.2%, down from the previous forecast of 2.4%.
The U.S. central bank is also optimistic that the labor market will continue to recover after the devastation that occurred in 2020 due to the COVID-19 pandemic. For 2021 the unemployment rate is expected to fall to 4.5%, compared to December’s forecast of 5.0%. For next year, the unemployment rate is expected to be 3.9%, compared to the previous estimate of 4.2%. In 2023 the unemployment rate is expected to fall to 3.5%, compared to December’s estimate of 3.7%.
The U.S. central bank is also forecasting inflation pressures to build. The projections shows that the Personal Consumption Expenditures Index (PCE) is expected to rise 2.4% in 2021, up from December’s projection of 1.8%. Inflation pressures are expected to continue to grow in 2022 with PCE rising 2.0%, up from December’s estimate of 1.9%. In 2023, the Federal Reserve expects inflation to hit 2.1%.
Core inflation expectations, which strip out volatile food and energy prices, are expected to rise 2.2% this year, up compared to the previous estimate of 1.8%. Next year, core inflation is expected to rose 2.0%, compared to December’s forecast of 1.9%. In 2023, inflation is expected to rise to 2.1%.
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