Gold price plunges more than $40 as Powell says inflation will be like the 'lumber experience'
New York (Jun 16) The gold space saw another significant selloff after Federal Reserve Chair Jerome Powell spoke about inflation, the Fed's dot plot, and clarified plans on tapering.
In response to the Fed's announcement, gold lost more than $40, with August Comex gold futures last trading at $1,812.40, down 2.37% on the day.
Markets focused on a few items from the Fed steement, including higher inflation expectations for this year and a possibility of two rate hikes as soon as 2023. Core inflation is now estimated to run at 3% this year versus the previous forecast of 2.2%, which was projected back in March.
Powell still maintained that inflation is transitory. "The problem right now is that the demand is very strong, and incomes are high," Powell told reporters on Wednesday. "If you look behind the headline numbers, you'll see that the incoming data are consistent with the view that prices that are driving that higher inflation is from categories that are being directly affected by the recovery from the pandemic and the reopening of the economy."
Powell drew parallels between the transitory inflation and the surge in lumber prices, which are now settling down after a massive rally.
"Over time, these things driving up inflation will be temporary … The experience with lumber prices is illustrative of this. Prices that have moved up really quickly because of the shortages and bottlenecks should stop going up. And in some cases should actually go down. And we did see that in the case of lumber," he said. "Our expectation is that these high inflation readings that we're seeing now will start to abate. And it'll be like the lumber experience."
Powell added that the U.S. might see the same situation play out in other categories, including used cars. "Used cars are going up because of strong demand and limited supply. But we do think it makes sense that it will stop and reverse," he said. The timing of that is uncertain, and so are the effects in the near term."
Powell also addressed the problem of labor shortages when asked about what full employment would look like in the post-pandemic world.
He pointed out that what's holding back employment growth is a mix of factors, including a slew of retirement, the time it takes to find a new job, fears related to the COVID-19 infection, not all child care facilities being reopened yet, and the existing unemployment benefits.
"Unemployment insurance for 15 million people will end and either be diminished, and that may also encourage some to go back and take jobs," Powell said.
Overall, the Fed sees strong job creation building into the summer and going into the fall...And the recovery, although still incomplete, remains strong, with real GDP n track to post the fastest rate of increase in decades, the Fed chair highlighted.
Many of the questions Powell received were about tapering and the guidance around reducing the $120 billion a month of asset purchases.
"You can think of this meeting that we had as the 'talking about talking about' meeting, if you'd like," Powell said. "I now suggest that we retire that term, which has served its purpose."
Powell noted that tapering would be discussed at future meetings, stressing that the Fed will provide advance notice before any concrete announcement is made. "The near-term thing is really about the path of asset purchases. We had a discussion about that today and expect to think about our progress at future meetings," he said.
Future tapering will be "orderly, methodical, and transparent," he said. "We see real value in communicating well in advance."
When asked about the future rate hike path, Powell warned that the Fed's dot plot is not a plan and should be taken with a "big grain of salt."
"We did not have a discussion whether a lift-off is appropriate at any particular year. It is too early to talk about that," Powell stated. "The dot plot is not a great forecaster of future rate moves."
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