Gold futures closed more than $20 lower on Wednesday (March 16) after the Fed raised interest rates by 0.25%. In addition, there are signs of progress in the peace talks between Russia and Ukraine.
- The gold contract was down $20.5, or 1.06%, at $1,909.2 an ounce.
- Silver was down 44.8 cents, or 1.78%, at $24.71 an ounce.
- The platinum contract was up $5.6, or 0.56%, at $1,008.1 per ounce.
- The palladium contract was down $44.70, or 1.9 percent, at $2,367.30 an ounce.
Peace talks between Russia and Ukraine continue to proceed at a positive and constructive level. Recently, Russia and Ukraine came close to a partial agreement on the peace talks after Ukraine agreed to discuss neutral status. This is a positive sign that Russia could end the war in Ukraine.
The Ukrainian leader has made it clear that Ukraine will not join the North Atlantic Treaty Organization (NATO), with an agreement with Russia to end the war in Ukraine moving closer.
That the talks are on the right track could be confirmed by the Russian side. Russian Foreign Minister Sergei Lavrov said yesterday,
“The negotiations are not easy for obvious reasons. But nevertheless, there is some hope of reaching a compromise. Neutral status is now being seriously discussed seriously along, of course, with security guarantees. This is what is now being discussed at the talks. There are absolutely specific wordings and, in my view, the sides are close to agreeing on them.”
In the U.S., the Fed published its interest rate decision. The Federal Open Market Committee (FOMC) of the U.S. Federal Reserve raised interest rates by 0.25% at its meeting yesterday. Previously, 0.25% had been assumed and since the outbreak of the war in Ukraine, there had even been speculation about no rate hike. The Fed wants to send a symbolic signal that rising inflation is to be fought. However, the inflation rate is currently 7.9%. With an increase of only 0.25%, real interest rates remain at -7.4%. Therefore, this first small interest rate hike can probably only be seen as symbolic. Incidentally, this is the Fed’s first interest rate hike in 3 years.
In the meantime, Fed officials are forecasting three rate hikes in 2023, but no rate hikes in 2024.
The Fed has also announced a reduction in its balance sheet at its future meetings. The balance sheet includes nearly $9 trillion in U.S. Treasury bonds and mortgage-backed securities (MBS).
According to the Fed, the war in Ukraine and the COVID-19 outbreak have created uncertainty in the U.S. economy. In the short term, these factors are likely to increase inflationary pressures and weigh on the economy, but the increase in the short-term interest rate target is of benefit in containing inflation, which has reached a 40-year high.
Meanwhile, the Fed lowered its forecast for US economic growth this year from 4.0% to 2.8% and maintained its forecasts for 2023-2024 of 2.2% and 2.0% respectively. Long-term growth is expected to be 1.8%.
The Fed raised its forecast for short-term interest rates this year to 1.9%, while it raised its forecast for 2023-2024 to 2.8% and 2.8%, respectively, and lowered its forecast for long-term rates to a level of 2.4%.
Meanwhile, the Fed raised its inflation forecast for this year to 4.3%, while it raised its forecast for 2023-2024 to 2.7% and 2.3%, respectively, and left its long-term inflation forecast at 2.7%.
The Fed also kept its 2022-2023 unemployment forecast at 3.5%, raised its 2024 forecast to 3.6%, and kept its long-term unemployment forecast at 4.0%.
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Tuesday, March 17, 2022