Fed to raise rates again in March, follow up with fewer hikes: Reuters poll | Business News

Fed to raise rates again in March, follow up with fewer hikes: Reuters poll

23 Dec 2015 | Author: | No comments yet »

Gold edges higher after Fed rate rise.

Almost 48 hours after Federal Reserve policymakers announced a rise in the central bank’s key interest rate, there is further evidence that the market is responding.

LONDON — Gold edged higher on Friday, recovering from its biggest daily loss in five months as stocks and the dollar retreated, but remained near multiyear lows after the US Federal Reserve lifted interest rates for the first time in nearly a decade.February gold GCG6, +1.48% gained $15.40, or 1.5%, to settle at $1,065 an ounce on Comex, a day after sinking to its lowest settlement since 2009 Thursday. The central bank has had to turn to new tools to actually affect policy after lifting its target for the Fed funds rate by a quarter percentage point to between 0.25 per cent and 0.5 per cent on Wednesday.

The metal has recovered some lost ground after bottoming out on Thursday at $1,047.25 an ounce, within a few dollars of a near six-year low reached on December 3. But the yellow metal saw a weekly drop of 1%, its eighth weekly decline in the last nine. “We still maintain our long term view is bullish for the yellow metal because there [are] just so many events which can derail the global growth and volatility could pick up immensely,” said Naeem Aslam, chief market analyst at AvaTrade. The Fed’s reasoning was straightforward: If the economy grows too quickly, we could see the kinds of inflation and stock market bubbles that could endanger the entire economy. Also, “we have the longest bull rally for equities since the World War II, and this itself is another reason to play safe and what else could be a better option than holding the yellow metal.” “Gold remains heavily bearish and bears have been gifted an opportunity to install another round of selling momentum throughout metals before the end of the year.

It’s also, in that regards, a sign of confidence: After a slow and painful recovery, the Fed believes the economy is now strong enough to justify higher interest rates. The BNY Mellon tri-party repo rate, which includes all trades done under the Fed’s RRP, as well as transactions between banks and investors, rose from 0.124 basis points on Wednesday to 0.266 basis points on Thursday, according to the new data. With any hopes of a recovery in prices discounted, further dollar appreciation should send this zero yielding metal back towards $1,046 [an ounce] and potentially lower,” said Lukman Otunuga, research analyst at FXTM in a Friday research note. Critics dispute this. “When the Fed sets out to slow inflation by raising interest rates, what it’s literally doing is squeezing the supply of credit to slow down job and wage growth,” explains Jeff Spross for the Week magazine.

The data is pretty mixed historically,” said Macquarie analyst Matthew Turner. “The Fed is more aggressive in its forecast of interest rate rises than the market, but so are they in their expectation of rising inflation. Holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Shares, fell another 4.5 tonnes on Thursday to 630.17 tonnes, the lowest since September 2008.

Higher rates strengthen the attractiveness of the dollar, boosting the return of deposits in that currency, while making dollar-based assets more expensive to investors using other monetary units. A slack labor market—especially in the absence of unions or other mediating institutions—means less leverage for higher pay and less job security, more so for low and mid-wage workers. Which is all to say that the Fed’s hike could presage another year of steady growth, or a downturn as a still-fragile economy reacts to slightly tighter credit and slightly less liquidity. January platinum PLF6, +1.89% added $16.10, or 1.9%, to end at $860.80 an ounce, with a 2% weekly gain, while March palladium PAH6, +0.15% tacked on $1.50, or 0.3%, to $558.95 an ounce, scoring a 2.6% weekly climb. With rare exceptions, both parties are so organized and their nominees so skilled that they neutralize each other; their respective strengthes and weaknesses just don’t matter.

Even a modest economic effect, good or bad, could push the outcome in one way or another, as Americans decide that the economy has been good for them, or as they feel the pain from a recession.

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