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The Fed is Unlikely to Add Fuel to the Fire

Will the Federal Reserve’s first rate hike come or not? Until recently, analysts agreed that the Fed would raise rates slightly by 50 basis points at its mid-March FOMC meeting. At that time, however, there was no war in Ukraine to derail the plan to raise rates again.

Since the crisis in Ukraine and the sanctions imposed on Russia, commodity prices have skyrocketed. Nickel and copper have reached new all-time highs, oil prices are higher than they have been in almost 10 years, and gold is approaching a new all-time high. All of this will drive inflation even higher around the world, suggesting that in this environment, inflation should be countered with an appropriate interest rate policy.

But now the variable war comes into play. Historically, interest rate hikes are not particularly popular in wartime. Right now, the official U.S. economic numbers say the U.S. economy is strong, but the world economy is expected to take a severe hit from sanctions imposed on Russia. In that case, rising interest rates could hurt the economy even more, and the Fed won’t want that.

It is therefore likely that the Fed will hold off on raising interest rates because the effects on the global economy are not yet visible. This, in turn, will defeat the plan to raise interest rates several times this year. But the Fed will probably have no choice because the risk of a global economic downturn will further limit the Fed’s room for maneuver. This could mean that there will be no rate hikes at all. If this is the case, rising inflation will have to be accepted.

The current interest rate environment and the Fed’s ultra-loose interest rate policy are absolutely bullish for the gold price. Rising gold prices were only a matter of time after the immense currency printing and the resulting inflation. In addition, investors and citizens continue to worry about their purchasing power. This should continue to drive up demand for safe-haven assets like gold.

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