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Investing.com – He faces a difficult situation that requires him to either continue to raise the principal to rein in high inflation, or wait to avoid exacerbating the difficulties faced by banks, both options bitter.
On the other hand, it is waiting for the Fed’s move to rise towards record levels, whether the Fed proves interest rates or raises them. To explain this hypothesis, we review in this report the possible Federal Reserve scenarios and how they will reflect on gold in the short and medium term.
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The first scenario.. raising interest
Before the recent banking crisis, expectations were indicating a trend to raise interest rates in the March meeting, and therefore if the Fed does not raise interest, this may be a message to the financial markets that there is a major problem. And the Fed doesn’t want to send that kind of message.
The CME Group says that the majority of market players are counting on the assumption of a moderate increase, by a quarter of a percentage point, or 25 basis points.
However, the US Federal Reserve’s preoccupation and its main objective currently is fighting inflation, by raising interest rates, and therefore the occurrence of economic damage and economic slowdown in the context of those policies is normal when monetary policy attempts to curb inflation.
In this scenario, in which the markets expect an interest rate hike of 25 points, gold may experience a noticeable decline in the short term, but in the medium term it may rebound towards new highs due to the continued banking crisis.
This is due to the fact that one of the most important causes of the banking crisis is the high interest rate and the Fed’s tightening policy, and therefore with the continuation of the same policy that led to this crisis and supported gold during the past few days and pushed it above the 2000 level, the precious metal may overcome the policy of raising interest, driven by the uncertainty that may The coming period hangs over the markets, especially since the crisis is not over yet.
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Gold and the dollar
CMC Markets analyst, Tina Ting, said, “It is likely that the Federal Reserve will soon raise interest rates to rise again due to a possible additional decline in dollar and US bond yields.” Ting expects gold prices to trade between $ 2,500 and $ 2,600 an ounce. .
A weaker dollar could support gold prices, according to HSBC’s chief precious metals analyst James Steele, who expects a 25 basis point rally from the US Federal Reserve.
There is usually an inverse relationship between gold prices and the US dollar, but investors tend to admire the safety that the US treasury gives, which is represented in the dollar from their point of view, and they rush to gold at one time, which is during periods of financial stress.
“This scenario doesn’t happen often but when it does, it’s always a sign of heightened investor concerns,” Steele said.
The other scenario is fixing the interest
With regional banks facing increasing customer withdrawals or at least the risk of them happening, banks are expected to further tighten lending standards, making it more difficult for consumers and businesses to obtain loans, according to Goldman Sachs (NYSE: 0). This will likely hurt economic growth and dampen inflation, so the Fed may not have to raise and hold rates.
“Overall, the magnitude of the rise in emergency lending by the Federal Reserve confirms that this is a very serious crisis in the banking system and will have significant implications for the real economy,” Capital Economics wrote to clients.
On the other hand, raising the interest rate could complicate the conditions that led to a run of banks by lowering the price of bonds owned by regional banks, which threatens their financial health and leads to more runs.
Worse, it was the Fed’s aggressive monetary tightening campaign that sparked the problem, giving Fed officials reason to be especially cautious, according to Bostancic.
“We would be surprised if, after just a week of major efforts to shore up financial stability, policymakers risk undermining their efforts with a rate hike,” Goldman Sachs said.
In this scenario, gold will receive more support, given that the yellow metal is going in the opposite direction to interest rates, and thus fixing it will be harmful to the dollar, which supports gold.
In addition, fixing interest may indicate that there is a financial crisis that the Fed knows about, especially since expectations were moving in the direction of raising interest rates, whether by 50 points or 25 points, and therefore if interest is fixed, this will reinforce investors’ fears, which pushes them towards a safe haven. gold.
