Speaking at the Economic Club of
Chicago, US Federal Reserve (Fed) Chairman Jerome Powell was in the spotlight
yesterday and highlighted the potential economic consequences of President
Donald Trump’s tariffs on the US economy.
‘Tariffs are highly likely to generate at least a temporary rise in
inflation’
Powell underlined that Trump’s policy
changes are ‘unlike anything in modern history and have put the central bank in
uncharted waters’, adding that ‘the policies are still evolving and their
effects on the economy remain highly uncertain’. He stated that the announced
tariff increases were higher than anticipated, and that ‘the same is likely to
be true of the economic effects, which will include higher inflation and slower
growth’.
According to survey and market-based
measures, near-term inflation expectations have increased, but longer-term
inflation expectations remain ‘well anchored’. However, Powell said that
‘inflationary effects could be more persistent’.
Powell indicated that a part of the
tariff burden would be paid by the public, and unemployment is expected to rise
as the economy cools. US President Donald Trump is clearly not a very happy
chap this morning regarding Powell’s recent remarks, noting that the Fed
Chairman’s termination ‘cannot come fast enough’:
Fed on hold for now
Powell stressed that the Fed’s best course of action right now is to remain
on hold until data reveals a clearer path. He noted that the central bank is
‘well-positioned to wait for greater clarity before considering any adjustments
to our policy stance’. Despite this, Powell refrained from providing any
indication as to the future rate path. Markets are pricing in nearly 90 basis
points (bps) of easing this year, so the expectation is for about three rate
cuts by the end of the year, with June or July’s meeting on the table for a
potential 25 bp cut.
Providing a more candid perspective on the new government, Powell remarked
that the effects of the administration’s tariffs may steer them away from their
objectives, indicating that the Fed could face a conflicted mandate – maximum
employment and stable prices. He stated that if this conflict comes to
fruition, ‘we would consider how far the economy is from each goal, and the
potentially different time horizons over which those respective gaps would be
anticipated to close’.
Gold: Buy the dip?
Powell’s comments immediately guided US equities southbound and underpinned
a bid in the price of Spot Gold to yet another fresh all-time high, with price
action currently trading off highs of US$3,574 ahead of the US cash open.
With Goldman Sachs and UBS raising their year-end Gold price forecasts, and
the trend evidently to the upside, this would be a challenging market to short
at this point.
Despite the yellow metal registering long-term overbought conditions – the
monthly chart’s Relative Strength Index is testing levels not seen since 2008 –
picking tops in a trend demonstrating strong momentum at all-time highs is
difficult.
Consequently, investors will likely seek dip-buying opportunities. I am
seeing very little support to work with on the monthly scale right now, though
the daily chart highlights an interesting decision point zone at
US$3,193-US$3,245, located just north of notable support from US$3,148. The
daily demand zone at US$3,000-US$3,058 is also a worthwhile base to pencil in
the watchlist. Ultimately, if a correction should materialise from current
levels, I will watch how price behaves at US$3,193-US$3,245, given I believe
that this area warrants some caution due the possibility of a whipsaw through
the noted area (tripping stops) into US$3,148.
Charts created using TradingView
Written by FP Markets Chief Market
Analyst Aaron Hill
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