The most recent FOMC statement and economic outlook indicate that interest rates will remain low to near zero until the end of 2023, which is beneficial for the "last resort" gold market.

On Wednesday, the US Federal Reserve issued a statement regarding the FOMC meeting, which resulted in the US central bank keeping interest rates and quantitative easing conditions unchanged.

On Wednesday, the US central bank pledged to keep interest rates near zero until inflation takes a course, surpassing the 2% target.

In a report published by the American "Oil Price" website, writer Arcadius Seron said that this statement had undergone significant changes compared to the issuance of last July, and it reflects the new monetary strategy of the Central Bank, which was adopted at the end of last August, Which assumes an inflation rate of 2% over time, not on an annual basis.

New strategy

In the first place, the members of the committee acknowledged the shift from flexible targeting for inflation to medium flexibility targeting, which allows offsetting low inflation, which was recorded for one period at a high rate later, and it was stated in the statement that the committee also seeks to achieve maximum employment, and expects to adhere to an accommodative monetary policy Until the desired results are achieved.

Second, and most importantly - according to the writer - the Federal Reserve announced that the new economic conditions must be dealt with before raising interest rates.

Previously, the US central bank used to start the monetary tightening cycle when it was sure that the economy was on the right track towards achieving the maximum possible objectives related to employment and price stability;

But this time, it will not change the interest rate until inflation reaches 2%, and it is already on its way to surpass this level.

What does that mean for the gold market?

The author explained that the Fed's statement appears to be flexible;

Because it indicates that the bank will not abandon its zero interest rate policy for years to come.

The US central bank has made the issue of monetary tightening based on stricter conditions, and since the nominal yields of bonds will remain low for a longer period along with negative real interest rates, investors should become accustomed to them;

This should provide support to gold prices during this process.

The Federal Reserve announced that the new economic conditions must be dealt with before raising interest rates (Reuters)

Expectations

Along with the current monetary policy statement issued on September 18, the FOMC has released its new economic forecasts, and GDP growth is expected to be higher this year;

But it will decrease later, and the inflation rate will also increase, in exchange for a decrease in the unemployment rate.

The Federal Open Market Committee expects - in particular - that GDP will decline by 3.7% in 2020, increase by 4% in 2021, and 3% in 2022.

The unemployment rate is expected to reach only 7.6% in 2020, compared to 9.3% in June.

But the fact that a recovery is registered faster than expected is bad news for gold prices, and despite that, general economic activity is still much lower compared to the pre-pandemic level, according to the author.

When it comes to personal consumption expenditures inflation, the FOMC now expects the inflation rate for 2020 to rise by 1.2%, exceeding last June's forecast of only 0.8%, however the FOMC predicts that inflation rates will be below average. Targeted until 2023, which is another good justification for continuing its flexible monetary policy, which will support gold prices while the dollar's value is declining.

The writer believes that the Federal Reserve prefers to keep interest rates near zero at least until the end of 2023, indicating that this decision is in the interest of the gold market, which thrives under the policy of zero interest rates and negative real interest rates.

 Positive signals

But in the midst of the positive outlook for the Federal Reserve in the near term, the price of gold has decreased in the markets, and this may be attributed - according to the writer - to that investors expected more flexibility, or that they focused only on the fact that the Federal Reserve raised its economic forecast for the 2020 GDP.

It is noteworthy that gold prices touched today, Wednesday, the lowest level in 6 weeks, with the rise of the dollar in light of the decline in morale in Europe;

Due to the Corona virus crisis, while investors grew concerned about more stimulus from the US Federal Reserve, according to Reuters.

And gold lost 1% in the spot market, down to 1880.4 dollars an ounce by 06:41 UTC.

And earlier in the session, gold hit its lowest level since August 12 at $ 1873.70.

In futures trading in the United States, gold lost 1.5% to $ 1879.10 an ounce.

A strong dollar raises the cost of the yellow metal to holders of other currencies, at a time when experts believe that "gold is now more sensitive to the dollar than any other factors."