- Fed rate hikes may not necessarily exert downward pressure on gold prices.
- The medium-term outlook for the precious metal remains fundamentally bullish.
Prior to the Federal Open Market Committee meeting, gold prices are surging, climbing over 1.2% intraday to reach $4,345. Throughout the past three weeks, a strengthening US dollar and escalating yields on US Treasury bonds have weighed heavily on the non-interest-bearing metal. However, as the greenback retreated, gold swiftly mounted a robust counter-attack.
An increase in the federal funds rate from 3.75% to 4% appears virtually assured. The baseline scenario for the interest rate futures market involves a tightening of monetary policy, alongside an FOMC forecast indicating readiness to act further in 2026. Such a trajectory would likely stabilize the US dollar and suppress long-term government bond yields as concerns ease over the Fed losing its grip on the long-term economic situation. This scenario would be highly favorable for gold. Conversely, should the Committee project three rate hikes in its updated outlook, the greenback will surge, subjecting the precious metal to a significant wave of sell-offs.
Former Fed Chair Jerome Powell demonstrated a remarkable ability to temper market sentiment regarding FOMC forecasts. Whether Kevin Warsh, a vocal opponent of forward guidance, can replicate this finesse remains to be seen. His hawkish rhetoric following the June meeting and at the Jackson Hole symposium significantly bolstered the US dollar and precipitated a decline in gold prices at the end of the previous month. Gold bulls have legitimate cause for concern in the current climate as well.
Concurrently, the medium- and long-term outlook for the precious metal remains constructive. An interest rate hike is certain to provoke discontent in the White House, where ongoing pressure on the Fed is fueling the ‘debasement trade’. Persistent US fiscal deficits remain unresolved, and the Treasury’s attempts to intervene in currency and debt markets are increasingly driving demand for decentralized finance assets.
Under these conditions, any decline in gold prices triggered by the Fed’s initiation of a rate-hike cycle could present optimal buying opportunities for the metal.