The U.S. economy has entered a technical recession, with data from the Bureau of Economic Analysis showing that the country’s GDP dipped by almost 1% in the second quarter of the year. This comes after a 1.6% drop recorded in the first quarter.
Last month, the Federal Open Market Committee hiked interest rates by more than 70 basis points, to reach 2.25%–2.50%.
While the Federal Reserve has been tightening its monetary policy, the fed has yet to turn restrictive or hawkish. This is because it raised the rates to a neutral level, moving from rates that were extremely accommodating to levels that are moderately accommodative.
This is not good for gold, which does not perform well when rates of interest increase. When interest rates rise, the dollar performs better, which in turn pushes the price of gold lower. At the moment, the slowing down of America’s economy may bring about a period of stagflation, which will be good for the price of gold. It is expected that the deteriorating macroeconomic outlook will increase the safe-haven demand for this precious metal.
It should be noted, however, that steep hikes may drag down the price of gold before it begins its next rally. It may not be long before the Federal Reserve eases its stance, especially since the Federal Open Market Committee revealed last month that indicators of production and spending had softened. In the July monetary policy statement, Committee Chair Jerome Powell indicated that the pace of the increase was likely to slow down in the near future.
The Federal Reserve also did away with its forward guidance, with Powell noting that instead of offering clear guidance, the reserve would proceed on a meeting-by-meeting basis. This signals that the U.S. Central Bank isn’t certain about the state of the nation’s economy. It also suggests that the Fed may be worried about the recession and is working toward a dovish turn.
The rate of unemployment remaining low makes the Federal Reserve comfortable as it tightens its monetary policy stance. However, if the labor market worsens, this may cause the Fed to return to an accommodative stance and begin cutting rates of interest.
Additionally, as inflation increases, it may become harder for the economy to stomach higher rates of interest. It is expected that the Federal Reserve will stop its tightening cycle and instead adopt a rhetoric that is more dovish to promote economic growth.
In the meantime, the harsh economic realities are likely to favor gold producers such as Newmont Corporation (NYSE: NEM) (TSX: NGT) since the price of gold is likely to remain high.
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