Bullish Gold Response to Fed’s Policy Change

The Federal Reserve’s long-awaited tapering decision was greeted with cheers rather than jeers by precious metals investors, igniting a rally in gold that pushed the price per ounce back above $1,800.

For months, financial markets had anticipated, with some trepidation, the central bank’s decision to begin reducing—tapering—its huge monthly purchases of Treasury and mortgage-backed securities that have injected $120 billion into the economy to support a recovery from the pandemic-induced recession. Investors viewed the tapering announcement as a prelude to the Fed hiking interest rates—typically a negative for gold. 

But Fed Chairman Jay Powell gave no indication the central bank plan to hike rates any time soon. “We think we can be patient,” the Chairman said in a press conference. In an accompanying statement announcing the tapering, the Fed said its policy-making Open Market Committee, “decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.” The fed funds rate is the interest rate at which banks borrow overnight funds from each other. 

The bottom line is that the Fed plans to keep printing tens of billions of dollars through the middle of 2022 as it only gradually reduces its $120 billion in bond purchases by $15 billion each month. That continued injection of cash will help fuel inflation, which is accelerating at the fastest pace in decades—running at more than five percent annually, as measured by the consumer price index, and more than four percent by the Fed’s favorite measure, the personal consumption expenditures price index, which covers a wide range of household spending. 

With inflation rising, the Fed still committed to printing many billions of dollars into the summer, and interest rates unlikely to move much, gold may now have a clear path for a sustained rally.