Gold Price Falls, Then Recovers After Fed Keeps Rates Steady

The gold price fell on Wednesday (October 28) after the US Federal Reserve kept interest rates unchanged.

The Federal Open Market Committee voted 10 to two to keep its benchmark interest rate at 3.75 to 4 percent. Fed officials Lisa D. Cook and Beth M. Hammack dissented and called for a 0.25 percentage point rate hike.

After raising interest rates by 0.25 percentage points in September, the decision to keep rates steady came as policymakers weighed persistent inflation against signs of a strong economy.

Higher oil prices have added to inflation concerns because rising energy costs are expected to make it harder for inflation to return to the Fed’s 2 percent target.

Fed Chair Kevin Warsh acknowledged that the central bank has not yet achieved price stability.

“We’re working on it,” Reuters quotes him as saying during a press conference.

"My judgment is we have seen an improvement in productivity,” Warsh continued.

“We can't ⁠measure it precisely. I think most of that change in productivity precedes ⁠everything we're talking about superintelligence, but productivity has been moving higher in the economy, however imperfectly measured.”

The gold price fell as low as US$4,034.38 per ounce in the immediate aftermath of the Fed's decision, but recovered just hours later, peaking for the day at nearly US$4,075. Last week it dipped briefly below US$4,000.

The Fed also confirmed that the interest rate paid on reserve balances will remain at 3.9 percent, effective Thursday (October 29). The primary credit rate will remain at 4 percent.

To implement the decision, the Fed has directed its New York trading desk to maintain the federal funds rate at 3.75 to 4 percent and purchase short-term treasury securities as needed to maintain ample bank reserves.

The next Fed meeting is scheduled for December 8 to 9.

Sucden Financial analysts have said the gold price could struggle to rise because of high US treasury yields, inflation concerns and the Fed’s cautious approach. Central bank purchases could help keep the metal from falling, but weaker investor demand for gold-backed funds could limit price gains.

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