Gold and Dollar React to FED Interest Rate Decision: Latest Update
Fed Keeps Interest Rates Steady at 5.50 Percent
In the highly anticipated decision, the Federal Reserve has chosen to maintain the policy rate, leaving it constant at 5.50 percent. This decision has been in line with market expectations. However, the question remains: what does this mean for the direction of gold, which has recently surpassed the $2,000 mark due to the Israel-Palestine conflict? Additionally, how does an increase in interest rates impact the value of the dollar?
Economist Hikmet Baydar addressed these questions in an interview with milliyet.com.tr. Baydar stated that the decision to maintain interest rates was not surprising, as the market had already priced in a 98 percent chance of no change. He also mentioned that the recent release of the producer PMI figures, which showed a decrease in inflationary pressure, further supported the decision to keep rates unchanged.
As for whether the Fed will increase interest rates again this year, Baydar believes it is unlikely in the short term. He explained that fluctuations in energy prices, particularly due to the Israel-Palestine conflict, may lead to inflationary pressure, which could prompt a rate hike. However, Baydar suggests that given the current global economic recession, an interest rate increase may not be necessary.
In terms of the highest level the Fed interest rate could reach, Baydar believes that it is close to its peak at the current rate of 5.50 percent. He suggests that the 5.50-5.75 percent range may be the upper limit, but for a further increase to occur, a clear upward movement in inflation would need to be observed. Only if there is a significant movement in energy prices creating inflationary pressure, a 25 basis point increase could be expected.
Regarding the impact on the dollar and gold, the Fed’s decision has not had a substantial effect on the market thus far. However, an increase in interest rates for US bonds has been observed, coinciding with the Israel-Palestine conflict. In the past, geopolitical risks have led to an increase in demand for US bonds. However, this conflict has diverted funds away from the US market, resulting in a sale of US bonds.
As for gold, Baydar points out that high levels of debt in the US, coupled with the country’s credit rating under review, have led to an increase in interest rates. The surge in demand for US bonds and efforts to hold onto them have strengthened the dollar and subsequently depreciated the euro. Baydar also notes that tension from recent events, such as the missile fired from Yemen, contributes to the rise in gold prices. The expectation of an insecure dollar and the potential spread of war are the primary reasons behind the upward trajectory of gold.
The direction of the Dollar to Turkish Lira (TL) exchange rate is uncertain, which affects the price of gram gold in Turkey. However, as gold gains value internationally, the price of gram gold in Turkey is also likely to increase. The rise in interest rates could potentially attract foreign investors back to the TL, which may result in a slight downward movement of the currency. This, in turn, may have a lowering effect on gold prices.
In conclusion, while the Fed’s decision to maintain interest rates at 5.50 percent has not significantly impacted the market at present, various factors such as energy prices, geopolitical risks, and inflationary pressure could influence the direction of gold prices and the value of the dollar in the coming months.
