Few Fed meetings in recent memory have presented the FOMC with a more uncomfortable set of competing signals than yesterday. The Iranian conflict and its impact on the prices of oil and oil-dependent products has created the possibility of inflationary movement, but still more likely to slow economic activity, leading to higher prices.

As if balancing the Fed’s two congressional mandates, stable prices and maximum employment, wasn’t difficult enough, they just learned that the fourth quarter was revised down to just 0.7 percent growth. Additionally, consumer spending is showing signs of fatigue, the labor market is slowly weakening, and financial conditions have tightened due to private credit pressures and the recent appreciation of the dollar.

Against this backdrop, the FOMC held as expected. Stephen Meran was the lone dissenter, voting for a cut of 25 bps. The Fed left the earlier statement largely unchanged. The only notable addition was the following sentence regarding the Iranian conflict:

The impact of developments in the Middle East on the US economy is uncertain.

The Fed released its quarterly (SEP), shown below. The only notable change was an increase in their collective inflation forecast. Its forecast rose 0.3 percent from December’s SEP, compared with a 0.2 percent rise. According to estimates, the Fed still expects one this year.

Gold falls on higher PPI and oil prices: Confused?

Prices fell about 2% on Wednesday despite oil trading near $100 and PPI being hotter than expected. If you think gold is an inflation hedge, you’re in for a bit of a dilemma. Let’s explain.

For starters, the daily volume of gold or any other asset isn’t always tied to the fundamentals. Long-term trends better reflect fundamentals. However, there is some reason for Wednesday’s price drop. The quote below from FinViz explains why.

Gold futures fell 2 percent as an escalation in the Iran-Israel conflict kept oil prices above $100 a barrel and fueled inflation fears. Hawkish feed bet

Since higher oil prices are likely to lead to inflation, it becomes more likely that the Fed will shift to a more hawkish policy stance. Historically, gold prices have correlated more closely with real interest rates (the yield less inflation) than with inflation. When real rates are low or negative, it means the Fed’s policies are overly hawkish. Such aggressive monetary policy often goes hand in hand with high gold prices.

Conversely, when real rates are high, as they are today and as investors expect them to go, gold tends to underperform. This has not been the case in the last few years, although it has been happening for many years, as we share in the graph below our article. Orange squares indicate that the correlation weakened in 2022. It has since faded further.

A concern for gold bulls is whether gold prices are returning to their true rate base. If so, a hawkish Fed may not bode well for gold prices.

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