In a much-anticipated speech, Powell reiterated expectations that policymakers would begin cutting borrowing costs next month and made clear his intention to prevent a further slowdown in the U.S. labor market.
“It is time to adjust policy,” the Fed chairman said in a speech at the annual conference in Jackson Hole. “The direction is clear, and the timing and pace of rate cuts will depend on upcoming data, the evolving outlook and the allocation of risks.”
Both U.S. Treasury yields and the dollar fell following his comments, helping to push gold prices up as much as 1.3% intraday and now within striking distance of Tuesday’s all-time high of $2,531.75.
The precious metal has hit new record highs in recent weeks as expectations grew that the Fed was moving closer to lower interest rates, which tends to benefit non-interest-bearing gold.
The price increase comes despite headwinds from high borrowing costs, which surprised experienced analysts as bullion typically has an inverse relationship with bond yields. The decoupling at the time was largely due to heavy central bank buying, purchases by Chinese consumers and demand for safe haven assets due to rising geopolitical risks.
The recent rise has been fueled by lower interest rates, suggesting that traditional macroeconomic drivers such as bond yields are returning to prominence. In recent days, swap traders have reinforced their bets that Fed policymakers will cut rates by as much as one percentage point by year-end, starting in September, with a cut of 25 or even 50 basis points likely.
Minutes from the central bank’s July meeting showed that several policymakers see a case for cutting borrowing costs next month. And recent labor market data, which showed far weaker employment growth than previously reported, reinforces that cuts are all but certain.
After Powell’s speech, traders stuck to their forecasts for the size of rate cuts they expect by the end of the year, with the odds of a quarter-percentage-point cut in September remaining unchanged.
“His speech appears to be positive for gold, copper and risk assets in general as he expresses his confidence that inflation is on track to 2%,” said Bart Melek, global head of commodity strategy at TD Securities, in a Bloomberg Note.
“He does not want a further slowdown in the labor market, which suggests he is willing to cut in September and may be more aggressive than 25 basis points if there is more weakness than expected.”
According to Melek, Powell’s speech also confirmed gold traders’ expectations that interest rates would fall. TD expects the price of gold to continue to rise to over $2,700 in the coming quarters.
(With files from Bloomberg)
