TD Securities strategist Bart Melek notes that the latest FOMC decision and the Iran-related Oil shock are pushing the Fed toward a neutral or even restrictive bias, delaying any rate cuts. Melek argues that elevated inflation expectations, a firm US Dollar and the risk of further hikes will keep yields high, undermining Gold in the near term before an eventual policy pivot.

Neutral to restrictive bias delays cuts

"The most recent FOMC decision to hold the overnight rate steady came with four Federal Reserve officials voting against a post-meeting statement that signaled the next interest rate move would be lower, suggesting to the gold market that the US central bank is shaping expectations for a neutral bias to take root."

"There is also a risk that if this oil shock continues into June, the next Fed move could very well be a hike, rather than the widely expected series of cuts anticipated before the Iran conflict started."

"With Strait of Hormuz-driven inflation pressures firmly embedded in market and Fed psychology for quite some time, a rate cut is very unlikely in the near term. Crude oil would need to stabilize some $5–10 below its current levels for inflation pressures to begin reversing."

"Indeed, as the continuation of this conflict suggests even higher crude prices, incoming Fed Chair Kevin Warsh is also unlikely to cut rates anytime soon."

"This means that rates across the curve are likely to remain elevated, with a risk of increasing into restrictive territory should energy prices spike further."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)