Investors are banking on the Federal Reserve raising rates by 25 basis points (bps) at the January 31 - February 1 policy meeting, after slowing its pace to 50 bps in December, following four straight 75-bp hikes. Meanwhile, the Gold price tends to benefit due to lower interest rates that otherwise decrease the opportunity cost of holding the non-yielding asset.
The most hawkish of comments came from St. Louis Federal Reserve's President James Bullard who said US interest rates have to rise further to ensure that inflationary pressures recede.
''We’re almost into a zone that we could call restrictive - we’re not quite there yet,” Bullard said Wednesday in an online Wall Street Journal interview. Officials want to ensure inflation will come down on a steady path to the 2% target. “We don’t want to waver on that,” he said.
“Policy has to stay on the tighter side during 2023” as the disinflationary process unfolds, Bullard added.
Bullard has pencilled in a forecast for a rate range of 5.25% to 5.5% by the end of this year.
However, economic reports, such as Producer Price Index and Retail Sales have recently shown disinflationary tendencies, reinforcing expectations that the Fed will continue to reduce its tightening pace in upcoming meetings.
With that being said, analysts at ANZ Bank recently wrote a note, entitled, ''Fed tightening not done yet.''
''So far in early 2023, US data releases have indicated a mild easing in inflationary pressures and softer demand. This indicates the Fed’s aggressive tightening last year is starting to take effect,'' the analysts explained. ''Weakness in housing is evident (existing home sales fell 17.8% last year), manufacturing activity has faltered and Retail Sales are returning to trend.''
Meanwhile, analysts at Brown Brothers Harriman have also of the opinion that the market is underestimating the potential for a higher for longer Federal Reserve. ''Core Personal Consumption Expenditures, PCE, has largely been in a 4.5-5.5% range since November 2021,'' they said. ''We think the Fed needs to see further improvement before even contemplating any sort of pivot.''
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