Gold price whipsaws as Warsh Fed holds, hawkish dots bite

XAU/USD swings as Warsh’s Fed removes guidance

In the statement, the Fed removed forward guidance language, in what was Kevin Warsh’s first lead on monetary policy. The Fed acknowledged that the economy is expanding solidly, despite uncertainty about the Middle East conflict and that the jobs market remains steady, keeping the unemployment rate little changed.

Furthermore, “Inflation remains elevated relative to the Committee’s 2 per cent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.”

The Summary of Economic Projections (SEP) shows that the median expects the Fed Funds Rate to end at 3.8%, up from March’s 3.4%, with the economy expected to grow 2.2% towards the end of 2026, and Core PCE, the Fed’s favourite inflation gauge at 3.3%, 1.3% above the Fed’s 2% goal.

Gold’s reaction

The yellow metal is tumbling, due to the hawkish tilt observed in the ‘dot-plot’ with half of the FOMC members expecting rates above the 3.75% threshold, while the rest opted to keep rates unchanged. There is speculation that Warsh opted not to provide forward guidance in the dot plot.

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.