Gold Prices May Rise as Federal Reserve Adopts Average Inflation Targeting



  • The Federal Reserve’s adoption of average inflation targeting may underpin precious metal prices
  • Rising inflation expectations driving gold prices to record highs


Record low interest rates, accommodative monetary policy and extraordinary fiscal stimulus have buoyed precious metal prices and seemingly created the perfect environment for non-yielding assets to outperform.

This fundamental environment nurturing gold’s surge to fresh record highs is showing little signs of abating, as Federal Reserve Chairman Jerome Powell unveiled the central bank’s updated monetary policy strategy “that will seek to achieve inflation that averages 2 percent over time”.

Speaking at the annual Jackson Hole economic symposium, Powell flagged the “persistent undershoot of inflation from our 2 percent longer-run objective” as a cause for concern and stressed that “inflation that is persistently too low can pose serious risks to the economy [and] lead to an unwelcome fall in longer-term inflation expectations”.

With “well-anchored inflation expectations critical for giving the Fed the latitude to support employment when necessary” the central bank opted to introduce “a flexible form of average inflation targeting”.

Spot gold vs inflation

Data Source – Bloomberg

Average inflation targeting essentially allows the Federal Open Market Committee (FOMC) to extend accommodative monetary policy measures following periods of below-target price increases to “achieve inflation moderately above 2 percent for some time”.

Given the Fed’s preferred measure of price growth has consistently undershot the mandated target since its implementation 8 years ago and current 5-year inflation expectations sit at just under 1.8%, record low interest rates appear here to stay for the foreseeable future.

Although the Fed’s intolerance to elevated levels of inflation is fundamentally bullish for gold prices, Powell’s statement that “if excessive inflationary pressures were to build….we would not hesitate to act” may concern bullion buyers, suggesting that perhaps only a mild overshoot will be tolerated by the US central bank.

US Jobless claims

Data Source – Bloomberg

Nevertheless, shifting focus to the FOMC’s second Congressionally-assigned goal of maximum employment it seems clear that an extension of stimulus measures is not only likely but necessary, as initial and continuing jobless claims remain at levels more than three times higher than the peak seen during the 2008 global financial crisis and the unemployment rate hovers at 10.2%.

Of course, the number of claims has declined significantly over the past 5 months and may be indicative of a recovering labor market.

However, high-frequency data suggests this recovery may be beginning to run out of steam as job postings on Indeed – the self-proclaimed number-one jobs website in the world – fell for the second consecutive week, ending a three-month run of consistent increases.

With that in mind, the Federal Reserve may have to expand its quantitative easing program in response to significant labor market slack in the coming weeks, after keeping its balance sheet steady at just under $7 trillion.

A marked increase in asset purchases probably intensifying bullion’s surge to fresh record highs by capping the potential upside for short-term bond yields and weighing on the performance of the liquidity-rich US Dollar.

Federal Reserve Balance sheet

Data Source – Bloomberg


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