World gold prices have just experienced one of the strongest declines in many weeks after the US Federal Reserve (Fed) kept interest rates unchanged but sent a tougher signal on inflation, increasing concerns about the possibility of interest rates continuing to remain high for a long time.
Before the meeting of the Federal Open Market Committee (FOMC), gold futures were still trading positively, increasing by more than 50 USD/ounce during the day as the market was almost certain that the Fed would keep interest rates unchanged.
However, sentiment quickly reversed after the policy statement and press conference of new Fed Chairman Kevin Warsh. In just about two hours, gold prices fell by 146 USD/ounce, equivalent to 3.31%.
The decline continued to extend to the next session when gold futures closed at 4,227.90 USD/ounce, down another 48.40 USD, equivalent to 1.13%.
The Fed decided to keep interest rates unchanged in the range of 3.50% – 3.75% with the absolute consensus of its members. However, what attracted market attention was that the monetary policy outlook has become tougher.
According to newly released economic forecasts, the average interest rate at the end of 2026 will be raised to 3.8%, higher than the 3.4% forecast in March. At the same time, 9 out of 18 Fed members believe that there should be at least one round of interest rate hikes before the end of the year.
In addition, most policymakers also assess that the inflation risk is still leaning towards increase.
One of the most notable points at this meeting is that Mr. Kevin Warsh did not make a personal interest rate forecast in the Dot Plot chart – a tool commonly used by the market to predict the Fed's monetary policy roadmap.
He also said that the Fed will remove future policy orientation content from the official statement, instead focusing on reflecting existing data.
This move is assessed by analysts as potentially making it more difficult for the market to predict the next direction of the Fed, thereby increasing volatility for interest-sensitive assets such as gold.
Mr. Bill Adams – Chief Economist for the US region at Fifth Third Commercial Bank said that the Fed's approach has changed significantly.
Messages from policy statements, Dot Plot charts, and the press conference show that the Fed's focus has shifted from the question of whether interest rates need to be raised in the near future," he said.
After the meeting, the USD rose sharply, thereby creating more pressure on gold. The greenback index rose nearly 1% in the first session and continued to rise on the next day.
Usually, a stronger USD will reduce the attractiveness of gold because the precious metal is valued in USD and does not yield yields.
However, many experts believe that the long-term outlook for gold has not been broken.
Inflation in the US remained above the Fed's target of 2% for a long time, while gold buying demand from central banks continued to be high. In addition, global economic instability and fiscal risks are still considered factors that could support gold in the medium and long term.
However, in the short term, the prospect of higher interest rates is dominating the market. When the Fed signals its willingness to maintain a strong anti-inflation stance, gold is likely to continue to face adjustment pressure and strong fluctuations in the near future.
