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Federal Reserve - What happens after the two big interest rate hikes?


Welcome back to our news highlights. Today's article views the perspectives of Federal Reserve board members on the economy and interest rate hikes. If you are interested in learning how to invest into gold, click here to browse our articles.

Household Economics & Decisionmaking Survey

  • Annual Survey of Household Economics and Decisionmaking 2021 indicates that concerns about the state of the American economy have been looming well before the invasion and price surges.
  • The survey shows that 24% of respondents believed the economic conditions were good or excellent, while others remained wary. Comparison with previous years of 2020 and 2019 indicate a 2% and 26% drop. 
  • However, many households report strong financial circumstances despite the economy's slowing, with at least 78% living OK or comfortably. The readings are the highest when comparing the previous eight years. Low-income families saw growth in this sector with a 13% increment from 2020 to 53%. 

Federal Reserve Comments

  • Atlanta Fed President Raphael Bostic states that once the Fed delivers the additional 50 basis points or half-a-percentage point hike, "a pause in September might be plausible". Bostic believes that policy decisions will depend highly on inflation dynamics and the impact of higher interest rates on the economy. Mr Bostic ends his statement with optimism that inflation will be much lower by then. 
  • Kansas Fed President Ester George broadens the scope of consideration for the economy by including additional events such as the Russia & Ukraine war and China's Covid-19 lockdown that may contribute to inflationary pressures or alleviate them. 
  • In addition to her statement, she indicates that the pandemic has altered the course of the US economy resulting in labour supply shortages and a service economy that has trouble adding back capacity due to reduction early in the crisis. 
  • George is also concerned that a "wildcard" may play as trillions of dollars in excess household savings can pose additional challenges for the Fed to control the heated economy. 
  • Investors are expecting the Fed to continue raising interest rates throughout the year. The rates are expected to be between 2.75% and 3% by year-end.

Money Market - Federal Reserve of New York

  • Monday (23 May 2022) saw a record $2.04 trillion stored in money market funds and banks as investors flock to safe-haven investments as interest rates rise and financial markets struggle to gain traction. 
  • The figures marked the first time the Federal Reserve of New York has seen substantial funds tucked away in an overnight reverse repurchase facility. 
  • According to the Investment Company Institute, money market funds last week sat at $4.5 trillion, a figure just shy of the early months of the pandemic by $0.3 trillion. Figures, however, remain much higher compared to preceding years. 
  • The decline in the issuance of treasury bills has fueled investors' interest in the Fed's overnight facility. Investors are competing for fewer assets as there is less supply of treasury bills and, as a result, pushing prices higher and forcing fund managers to search for alternatives.  

Gold Outlook

  • Gold remains bullish with a four-day streak. Spot gold opened at $1,852/ounce in Tuesday's Asian session. 
  • The rally in gold is said to be attributed to the weaker (DXY) US Dollar Index. The index eased around 2.8% after hitting 105.00 despite the rising odds of an additional 50 basis point hike in June.
  • Gold may witness a pullback towards $1,840 as the Federal Reserve is set to provide insights on monetary policy action in June.



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