Silver Price Tumbles, Then Rebounds After Fourth Fed Hike

After two days of meetings regarding monetary policy, the US Federal Reserve decided on Wednesday (December 19) to increase interest rates for the fourth and final time this year.

The Fed lifted the target federal funds rate by 25 basis points from 2.25 percent to 2.5 percent, causing the price of silver to decline following the hike announcement.

This was the Fed’s ninth hike in two years, with the central bank making the decision to increase interest rates despite a stock market selloff and stern warnings from US President Donald Trump.

“The Federal Reserve, in their FOMC statement today, remarked that they see a stable economy with low unemployment, strong household spending and an inflation rate which is within the targeted range. Given this outlook, it’s no surprise that they raised rates by 0.25 percent, up to 2.5 percent overall,” Brian Leni, founder of Junior Stock Review, told the Investing News Network.

The hike put further pressure on the white metal in a year that saw it drop almost 14 percent. 2018 saw investors abandoning precious metals such as silver and gold as safe havens during times of geopolitical turmoil. Rather, they favored the greenback as their safety net.

Silver dropped from a Wednesday high of US$14.77 per ounce to as low as US$14.53 after the hike was announced. However, by 1:00 p.m. EST on Thursday (December 20) it had bounced back to US$14.77. 

The gold price, which sunk to US$1,241.30 per ounce after the rate increase, also rebounded on Thursday, rising as high as US$1,266.20 in the afternoon. The yellow metal is seeing support from a drop in global stocks caused by the Fed’s guidance on further rate hikes.

Fed Chairman Jerome Powell said Wednesday that he expects the Fed will hike interest rates twice in 2019, down from the previously forecasted three hikes.

Policymakers also alluded to the idea that they may soon pause their monetary tightening campaign, noting a median projection of one move in 2020.

This slowdown will more than likely deter the US dollar from making more gains and allow silver to make up for some of the losses it experienced throughout the year.  

“I believe that further rate hikes in 2019 will be met with a lot of volatility and, ultimately, could be the tipping point for a 2008-style crash. Given that the market might see this coming, however, the black swan is most likely to come from another source,” Leni explained.

He added, “[i]t’s anyone’s guess as to how this plays out, but I think it’s safe to say, given the outlook, 2019 should be a good year for precious metals.”

Following the end of the two-day meeting in Washington, Powell said “economic activity has been rising at a strong rate.” Despite an outlook that is “roughly balanced,’’ officials pointed at potential threats from a softening world economy.

The Federal Open Market Committee (FOMC), “will continue to monitor global economic and financial developments and assess their implications for the economic outlook,” the statement says.

In addition, the FOMC made changes to key language in its statement, saying that it “judges that some further gradual increases” in rates will likely be needed, an alteration from previous language saying the FOMC “expect[ed] that further gradual increases” would be required.

“I believe that there will be a price to pay for the monetary policies that the Fed has adopted over the last 10 years, and at some point there will have to be reconciliation. In saying this, I have no idea when the reconciliation will occur, but I do think we are getting closer,” Leni noted.

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