Gold prices rise after Fed interest rate decision

On July 29, after a two-day policy meeting, the US Federal Reserve (Fed) decided to keep the reference interest rate unchanged in the range of 3.5-3.75%, in line with the forecasts of most investors.

This is the fifth consecutive time the Fed has not adjusted interest rates. In the previous year, this agency implemented three waves of interest rate cuts to support the economy.

Immediately after the decision was announced, world gold prices increased by more than 40 USD/ounce in just a few minutes. At many times, the precious metal exceeded the threshold of 4,100 USD/ounce. After that, gold prices narrowed down part of the increase but still maintained an impressive increase.

The recovery of gold took place in the context that the market was worried that the Fed might raise interest rates right at this meeting. Before the decision was announced, investors significantly raised expectations of tightening monetary policy.

CME Group's FedWatch interest rate tracking tool shows that the market is betting on the possibility that the Fed will keep interest rates unchanged at around 64%. This means that a significant portion of investors still predict that interest rates may be raised further.

Although not yet raising interest rates, the Fed continues to send a tough signal. Three members of the Federal Open Market Committee voted against the joint decision and proposed raising interest rates by another 25 basis points, equivalent to 0.25 percentage points.

These three officials include Fed Chairman Dallas Lorie Logan, Fed Chairman Cleveland Beth Hammack and Fed Chairman Minneapolis Neel Kashkari. The fact that there are up to three votes in favor of raising interest rates shows that the pressure to tighten monetary policy in the US is still high.

The Fed's policy statement under the chairmanship of Chairman Kevin Warsh continues to be shortened. The document mainly states the interest rate decision and reaffirms the goal of maintaining abundant reserves in the banking system, but does not provide specific orientations for the next steps.

The Fed assesses that US economic activity is still growing at a steady pace, although the level of instability is still high, partly due to the conflict in the Middle East. Productivity growth and capital investment are maintained, new jobs keep up with the growth rate of the labor force, while the unemployment rate has little changed.

However, the US central bank admitted that inflation is still higher than the target of 2%. Supply shocks, especially in the energy sector, are causing prices in some commodity groups to continue to rise.

After the Fed's announcement, the USD increased by about 0.3% against the Euro, to 1 Euro for 1.14 USD. The US stock market narrowed its decline, in which the S&P 500 index fell by about 0.18%.

Inflation and energy prices are forecast to continue to have a major impact on Fed policy. World crude oil prices have recently increased by about 7%, fluctuating in the range of 84-90 USD/barrel, as tensions in the Middle East escalate again.

Rising energy prices may cause prolonged inflationary pressure, while reducing the possibility of the Fed soon easing monetary policy. However, the US Central Bank's failure to raise interest rates in the July meeting has partly eased concerns, creating conditions for gold prices to recover strongly.