Gold Climbs After Fed Officially Pauses Interest Rate Hikes

After two days of meetings regarding monetary policy, the US Federal Reserve officially announced on Wednesday (March 20) that it will be pausing interest rate hikes for the entirety of 2019, sending gold on an upward trajectory.

The Fed also said it will only raise borrowing costs once more through 2021, and will slow the monthly reduction of its holdings of treasury bonds from up to US$30 billion to up to US$15 billion as of May.

The Fed noted that the reason behind these decisions is that it no longer feels the need to offset inflation with restrictive monetary policy.

“Recent indicators point to slower growth of household spending and business fixed investment in the first quarter […] Overall inflation has declined,” the Fed stated in its policy statement. The central bank kept federal funds rates at 2.5 percent.

The Fed noted that it will end its balance sheet runoff come September on the provision that the economy and money market conditions evolve as expected. If that happens, redemptions of mortgage-backed securities will be reinvested in treasuries up to as much as US$20 billion per month.

The combined announcements indicate that the Fed is now pausing on both fronts to adjust to weaker global growth and a slightly weaker outlook for the US economy.

“Growth of economic activity has slowed from its solid rate in the fourth quarter,” the Fed stated.  

This cooldown has allowed the precious metal to make gains, as gold is highly sensitive to rising interest rates because they boost the US dollar and lift the opportunity cost of holding non-yielding bullion.

Looking ahead, policy makers are expected to lift rates once to 2.6 percent by the end of 2020, and then hold them steady in 2021.

As of 3:12 p.m. EST on Wednesday, gold was up 0.61 percent, trading at US$1,314 per ounce.

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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.