Gold price (XAU/USD) is demonstrating a non-directional performance on Wednesday after printing a fresh seven-month high above $1,980.00. The precious metal witnessed immense strength on Tuesday after US Retail Sales for June showed that consumer spending momentum has slowed down but is still sufficient to push the Federal Reserve (Fed) to raise interest rates further at its July 26 FOMC meeting.
Inflationary pressures in the United States are slowing down as the recruitment process by firms is increasing at a snail’s pace. US firms are facing the wrath of higher interest rates by the Fed and tight credit conditions by regional banks. New filters have been added to the credit distribution process by commercial banks to maintain asset quality in a turbulent environment.
Gold price has turned quiet after printing a fresh seven-week high at $1,984.25 on Tuesday. The precious metal has rebounded after testing the 20-day Exponential Moving Average (EMA) at $1.947.28. Momentum oscillators indicate that sheer strength in the upside bias. The yellow metal is approaching the psychological resistance of $2,000.00.
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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