Gold Price Retreats as Fed Holds Interest Rates Steady

The US Federal Reserve left interest rates unchanged at this week's meeting, but announced that it will begin reducing its balance sheet next month.

federal reserve

The gold price edged lower on Wednesday (September 20) after the US Federal Reserve left interest rates unchanged and announced it will begin reducing its balance sheet next month.

As of 4:00 p.m. EST, gold was trading 0.2 percent down, at $1,301.2 per ounce, its lowest level in three weeks.

Despite not raising rates, the Fed indicated that if persistently low inflation rebounds, it may hike rates one more time this year and three times in 2018. 

Market watchers had been expecting interest rates to remain steady. In fact, 87.88 percent of Investing News Network readers who voted in a recent poll said the Fed would not increase rates this week.

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“The basic message is that the US economic performance has been good,” Fed Chair Janet Yellen said after the meeting.

That said, not all experts are confident that the Fed has a handle on the situation. “It is obvious Yellen and the Fed are perplexed about the current environment as it relates to inflation,” said First Franklin’s Brett Ewing in a note.

He added, “[t]hey continually say the low inflation numbers are transitory, but their expectations for it to change continue to be pushed out. Translation: they have no idea.”

Policymakers also said the central bank will start reducing its $4.5-trillion balance sheet in October.

“The Fed came out and said they were going to do their QE reversal of about $10 billion a month; they still expect a Fed rate hike in December and three more in 2018. This puts a little pressure on gold,” said Jeff Klearman, a portfolio manager at GraniteShares, a provider and manager of exchange-traded funds.

Gold traded below $1,300 just after the announcement, but rebounded minutes later. “The natural resistance is that hard number of 1,300,” said Dan Denbow, portfolio manager at USAA Precious Metals and Minerals Fund. “Investors seem to be locked into round numbers like that.”

Many analysts expect the yellow metal to be under pressure in the next few months, particularly if the Fed decides to increase rates later this year. That’s because higher rates curb the investment appeal of non-yielding assets like gold.

Gold “bulls are likely to be stressed as the market adjusts to incorporate Fed rate increases,” commented Rob Haworth of US Bancorp Wealth Management. “Prices are likely to see pressure through rest of year based on solid economic trends and markets beginning to price Fed rate increases.”

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

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