US Fed's Assessment On Economic Recovery: Impact On Indian Gold Rates

Jerome Powell, the US Fed Chair indicated a gradual tapering at the end of the Federal Open Market Committee (FOMC) meeting that impacted the international gold market immediately again. "If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted", the FOMC statement said. As an immediate reaction gold rates fell again, and Comex gold future dropped by 0.90% at $1762, while the spot gold market fell by 0.12% at $1766/oz, at 2.30 EDT on September 23. A nearly 1% drop in gold rates is now concerning because this might plunge again. The international gold market was struggling hard with lowering rates since August, this year, Comex gold future went below $1740 at that time. This happened mostly due to promising non-farm payroll data published in the first week of August.

In the present situation, the gold rates are subdued and expected to fall again as the US Fed Chair pointed towards tapering. Tapering will mean a halt in the Quantitative Easing (QE) that will directly lead investors to take shelter under government bonds. This will again tighten gold prices, impacting Indian gold rates similarly. India imports gold from foreign markets and is the second-largest importer globally. Hence the fall in international gold prices will be reflected here. Today Indian gold rates in the MCX October future fell by 0.71% at Rs. 46,341/10 grams. IBJA is having close eyes on the US Fed decision regarding tapering.

However, the Fed has kept the interest rate the same at zero to 0.25% for the time being now, and they will continue the purchase of treasuries and mortgage-backed securities at $120 billion/month. In addition to that, the US Fed has also indicated a rate hike around 6 to 7 seven times by the end of 2024, at 1.80%. This shows that the Fed officials are quite optimistic about the economic recovery in the country during the post-Covid period. Now, the 5-year treasury rates also inflated because the 'traders expected an aggressive path once benchmark increases begin'. Although the jobs data could not meet expectations at the start of September, the Fed's assessment on that is quite positive now. The retail inflation rate is also under control now.

The exact timeline regarding tapering will probably come out in the next month. In early November and mid-December, the FOMC will again organize its meetings. Chair Powell yesterday commented on the taper timeline, "could come as soon as the next meeting." Powell also added, "The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest-rate liftoff." David Zervos, Chief Market Strategist at Jefferies has shared his opinion about Powell's present status and optimism. Zervos said, "I sense just something a little more hawkish in Jay than usual, especially coming after his Jackson Hole speech which was extremely dovish."

Now, if the US Fed starts tapering from December, the gold prices will be down again and the yearly growth in gold prices will underperform. However, this will be a preferable time for Indians to buy gold.