Gold pulls back from $5,300 on hawkish hold by the Fed

Bullion turns volatile after the Fed holds rates and flags labor market stabilization, lifting the Dollar

The Federal Reserve’s monetary policy statement revealed that policymakers decided to keep rates unchanged at the 3.50%-3.75% range in a 10-2 vote split, as Fed Governors Stephen Miran and Christopher Waller, one of US President Donald Trump’s nominees to succeed Jerome Powell, both voted for a 25-basis-point rate cut.

In the statement, policymakers reiterated that inflation remains somewhat elevated and that the unemployment rate “has shown signs of stabilization.” They stated that the economic outlook remains uncertain and that they will remain attentive to both sides of the dual mandate.

Gold’s reaction to the Fed’s decision

Gold price edges towards the $5,290 region, before retreating below $5,280. XAU/USD's first reaction to the upside suggested that initially, traders saw the decision as dovish, due to the two dissenters. But the statement revealing that the labor market is showing signs of stabilization prompted traders to buy the Dollar.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.