Gold price jumps as Fed Chair Powell says rates may not have to rise as much due to tighter credit conditions

(Kitco News) The gold market rebounded after Federal Reserve Chair Jerome Powell said rates might not have to rise as much due to tighter credit conditions after the banking sector turmoil.

The aftereffects of the banking sector troubles took some pressure off the Fed to keep hiking rates, Powell said at the Thomas Laubach Research Conference Friday.

“The financial stability tools helped to calm conditions in the banking sector. Developments there, on the other hand, are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” Powell said. “So as a result, our policy rate may not need to rise as much as it would have otherwise to achieve our goals. Of course, the extent of that is highly uncertain.”

This is a sign that Powell could be looking to pause in June. The news calmed the gold market after investors began to price in another 25-basis point hike next month.

“We’ve come a long way in policy tightening and the stance of policy is restrictive and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses,” Powell said. “Having come this far we can afford to look at the data and the evolving outlook to make careful assessments.”

At the May meeting, the Fed proceeded with its tenth consecutive rate hike, which brought the federal funds rate to a 5-5.25% range – the highest since mid-2007. In just over a year, the Fed raised rates by 5%. The next monetary policy meeting is scheduled on June 13-14.

After Powell spoke, market expectations of a rate hike in June fell from nearly 50% to just 18.5%, according to the CME FedWatch Tool.

Powell reiterated that the banking system is “strong and resilient” and is well-positioned to deal with challenges. He pointed out that the rate path priced in by markets differs from the one forecasted by the Fed.

When asked about potential future supply shocks, Powell said they were possible but noted that it is hard to forecast. He explained that positive globalization supply shocks that contributed to low inflation “do not seem likely to be repeated.”

On inflation data, Powell commented that price pressures could be more responsive to changes in the labor market. “So far, data continues to support the view that bringing inflation down will take some time,” he said.

Gold jumped around $20 after hitting a low of $1,956.30 earlier in the session. June Comex gold futures were last at $1,978.40, up 0.95% on the day.